Duties and Responsibilities of a Company Director in Kenya

 Duties and Responsibilities of a Company Director in Kenya

As a director of a limited liability company in Kenya, there are certain statutory duties and obligations imposed on you by the Companies Act, 2015. Fail to meet these obligations and you risk being fined, prosecuted, personally held liable for the debts of the company, or being disqualified to hold directorship office in another company for between 5 to 15 years. These risks are particularly severe where a director is involved in unlawful, or illegal conduct when the company is insolvent, or where such conduct is discovered during a company liquidation.

What are the Duties of a Limited Company Director?

In law, a director is the directing mind and will of the company. The board of directors is therefore responsible for the day –to-day management of the company. The board is, inter alia, required to make policy and operational decisions to ensure the company meets its strategic objectives and legal responsibilities.

Seven Duties of Directors under the Companies Act

The Companies Act 2015 has codified the common law duties of the directors and buttressed them by giving them statutory sanctions for non-compliance.

(1) To act within their powers

Company directors are given certain powers to enable them to manage the company. Nevertheless, these powers must be employed in promoting the best interests of the company as set out in the company’s constitution and not to further directors’ or other third parties’ personal or other collateral purposes or interests.  

(2) To promote the company’s success

Under section 143 of the Companies Act, a director must act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members (shareholders) as a whole. In so doing, the director must have regard, inter alia, to the likely consequences of any decision in the long term, the interests of the company’s employees, the impact of the operations of the company on the community and the environment, the need to act fairly as between the directors and the members of the company; and the need to foster the company's business relationships with suppliers, customers and others. 

It should however be noted that where a company is insolvent the director’s duty under this head shifts to the interest of creditors of the company rather than its members (shareholders).

(3) To exercise independent judgement

Under section 144 of the Act, a director has a duty to exercise independent judgment. Therefore, though a director may seek professional advice before making decision, he or she must exercise independent judgement and not subordinate their power to the will of others or blindly follow such advice. Nevertheless, in certain situations a director may be required to act in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its director or in a manner authorised by the constitution of the company.

(4) To exercise reasonable skill, care and diligence

Under section 145, in performing the functions of a director, a director of a company must exercise the same care, skill and diligence that would be exercisable by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions performed by the director in relation to the company and with the general knowledge, skill and experience that the director has. Failure  to act with a certain degree of competence for the benefit of others could give rise to negligence claims to compensate the company for mistakes the directors make.

(5) Duty to avoid conflicts of interest

Under section 146 of the Act a director must avoid any situation where he or she has or can have an interest that directly or indirectly conflicts with or may conflict with the company’s interests. This duty specifically applies to a director exploiting any property, information or opportunity. This as an absolute duty and it does not matter whether or not the company could take advantage of that property, information or opportunity.

Non-compliance is a serious breach of director duties and criminal action could ensue. However, there will be no breach where the situation cannot reasonably be regarded as likely to give rise to a conflict of interest.

(6) Not to accept a benefit from third parties 

This is provided for under section 147 of the Companies Act and is part of a broader duty that a director should not profit from his position as a director without the company’s knowledge and consent. Company directors must work to promote the success of the business and should not accept a benefit (e.g. gifts, secret commissions, bribes or inducements) from third parties arising from his position as a director or which are intended to induce the director to act or not to act in a certain way. Therefore, offers for corporate hospitality or gifts should be regarded with caution as benefits provided to a director with the intention of winning new business could be considered a bribe. Besides being sanctioned in the Companies Act, such conduct may also be regarded as an economic crime and therefore sanctionable under the Bribery Act, 2016, the Penal Code and the Anti-Corruption and Economic Crimes Act, 2013.

It should be underscored that there is no breach where the benefit cannot reasonably be regarded as giving rise to a conflict. Moreover, benefits conferred by the company (and its holding company or subsidiaries) do not fall within this duty.

(7) To disclose any interest in a proposed transaction or arrangement Under section 151 of the Companies Act, a director must declare to his company board (for private company) and to members within seventy-two hours (for public companies) the “nature and extent” of any direct or indirect interest he may have in any transaction or arrangement to which the company is or may be a party. For public companies, if a proposed transaction or arrangement with the company, or a transaction or

arrangement that the company has already entered into, is for an amount, or for goods or services valued at an amount, that exceeds ten percent (10%) of the value of the assets of the company (as certified by external and independent auditors) the declaration shall, inter alia, also be made to the members of the company at a general meeting of the company.

A director must update any declaration if it becomes inaccurate or incomplete (although this may be unnecessary where a company has already entered into a transaction or arrangement). Nevertheless, there is no breach where a director is unaware of his interest or the transaction or arrangement to which the company is a party. In addition, a director need not declare an interest if he is unaware of a possible conflict or if his interest cannot reasonably be regarded as giving rise to a conflict.

Fiduciary Duties of a Director

Besides the foregoing, a company director’s duties extend to the company’s finances especially in relation to the preparation, presentation and filing of the company’s annual reports and financial statements at the end of the financial year. Although this duty may be delegated to professional accountants, it is the directors who are ultimately responsible for ensuring that accurate books of accounts are properly kept and that audited financial statements are presented for approval by shareholders during the company’s AGM that gives a true and fair representation of the company’s financial position.

Directors are also responsible in ensuring that the company complies with relevant taxes and other statutory deductions legislations and that appropriate returns are filed in time and applicable taxes or contributions paid.

What constitutes a breach of fiduciary duty?

There’s any number of different actions a director can take which could constitute a breach of fiduciary duty. These include: -

(a) Failing to comply with the company’s constitution or acting for an improper purpose.

(b) Failing to make a business decision in good faith and in the best interest of shareholders (or creditors where a company is insolvent).

(c) Placing a personal interest ahead of the company’s interest.

(d) Employing or using company’s property, information or opportunity to gain an advantage for themselves or a connected party.

(e) Engaging in conduct which is detrimental to the interest of the company with the intention of obtaining a personal benefit.

(f) Using their position to engage in a conduct that enable them to gain an advantage for themselves or a connected party (such as a family member) to the detriment of the company.

What are the Potential Penalties for Failing to meet your duties as a Director?

A director who breaches their duties can be subjected to various legal sanctions including an order for account or restitution by the company. Where the directors are unwilling to take action against the wrongdoer, one or more shareholders can institute a derivative action on behalf of the company against a specific director or directors.

Equally, under Part XXX of the Companies Act, the director could be the subject of an investigations by the Court or the Attorney General and thereafter prosecuted by the Director of Public Prosecution (DPP) for any offences arising from such investigations.

The consequences for breach of duties as a director include:

(a) Disqualification as a director – Part X of the Act provides for disqualification of directors for breach of duty and this can range from 5 to 15 years. This is reserved for serious cases such as fraudulent behavior, failing to file returns or properly maintain accounting records, fraud or breach of duty committed while company is in liquidation or under administration and serious statutory breaches and violations.  

(b) Personal liability for company debts – Directors that allow their company to trade while it’s insolvent could be made personally liable for the repayment of company debts.

(c) Removal from office – Under section 139, the company may, by ordinary resolution at a meeting, remove a director before the end of the director's period of office, despite anything to the contrary in any agreement between the company and the director.

However, a special notice is required for a resolution to remove a director under this section and appoint a replacement director at the meeting at which the director is removed.

(d) Damages or compensation for financial losses incurred – Where appropriate, the director can be pursued through the courts for an action for tracing of assets or order for account, potentially leading to the loss of personal assets.

(e) Setting aside transactions – Transactions that were entered into which were not deemed to be in the best interests of the company can be rescinded or cancelled.

(f) Criminal fines – Offences which are most likely to attract criminal fines relate to the failure to file documents at Companies House either on time or at all.

If you require any legal advice or guidance on your duties as a director or in drafting suitable director's service contract that would protect or safeguard your company's interest, kindly do not hesitate to contact me via mainacy@gmail.com 

The Advantages of Having a Shareholders’ Agreement

 

The Advantages of Having a Shareholders’ Agreement

A shareholders’ agreement is a formal agreement between all or some of the shareholders in a company. A shareholder agreement is usually considered alongside the company’s articles of association, which defines the relationship between the shareholder and is in law considered a contract inter se between the shareholders.  Nevertheless, invariably a shareholders’ agreement will have a clause which makes its provisions superior to those in the articles of association. 

A shareholders’ agreement is intended to protect the shareholders’ investments in the company, define the government structure, working relationship and power inter play between shareholder as well as protect the interests of the majority and minority shareholders in a company.  

Salient Features of a Shareholders’ Agreement

As indicated before, a shareholders’ agreement will encompass the rules that regulates the relationship between the shareholders and their respective interests. It acts as a record of parties’ agreement regarding the governance and running of their company. It also regulates the conduct of shareholders in terms of what can and cannot be done as well as their rights and responsibilities.  

Some of the matters that will be covered in a shareholders’ agreement include:

(a) The agreed business or businesses of the company

(b)  The company governance structure including the structure of the management team;

(c) Provisions on how or how the senior management team will be appointed;

(d)  How key decisions will be made in the company; that is, by who or what majority;

(e)  The rights, duties and obligations of shareholders;

(f)  Modes of financing of the company’s business or businesses;

(g)  Regulations relating to sale of shares in the company (e.g. permitted transfers, transmission of shares, pre-emption rights, as well as drag along and tag along provisions) or major assets of the company;

(h) Procedure regulating the number of directors, quorum in meetings and director’s appointment and removal from office; 

(i) Regulate the sale of material assets of the company;

(j) Outline the appointment and dismissal procedures in relation to directors; 

(k) defines the Dividend policy;

(l)  Make provisions for confidentiality and non-compete provisions

(m)  Outline the procedure for addition of new shareholder’s in a company; and

(n) Make provision for dispute resolution mechanism.

When is a Shareholders’ Agreement Required?

Though there is no legal obligation or requirements in the Companies Act, 2015 for there to be a shareholders’ agreement, it is a good practice and highly recommended for a shareholders’ agreement to be negotiated and signed off between the shareholders after formation of their company and before any business has been started.   It is advisable to even negotiate a shareholders’ agreement before the promoters have registered the company and signed off after the incorporation.  This can give promoters a clearer idea of what they would be entering into, the purpose of the company, the shareholding structure as well as funding options for the company.

For existing companies, a shareholders’ agreement should be negotiated and signed offer at the earliest opportunity and before any disagreements have arisen in order to record the parties’ understanding and agreement on the management including on governance and financing of their company as well as disputes resolution mechanism.

A new shareholders’ agreement should also be put in place when:

(a)  The shareholding structure of the company changes (e.g. as a result of new entrants (allotment of shares to a new shareholders or in event of transmission of shares to relatives of a deceased shareholders or exit of a shareholder through death or sale of shares);

(b) The company adopts a new business models or new businesses or subsidiaries;

(c) When a company is borrowing money from its shareholders;

(d) Where a shareholder’s shares are transferred to related parties who might not have relationship with existing shareholders;

(e) When a major director-shareholder is newly appointed or exits the business. 

What are the benefits of having a shareholders’ agreement for your company?

There are many benefits of having a shareholder agreement, and below are just a few examples:

(a) Confidentiality- Unlike memorandum and articles of association and special resolutions, a shareholders’ agreement does not need to be filed at the Companies Registry. Therefore, a shareholders’ agreement can provide mechanisms for internal working of the company and relationship between the shareholders which need not be disclosed to the general public). 

(b) Establishes shareholders’ rights, powers and restrictions – A shareholders’ agreement defines and offers clarity on the rights and powers as well as restrictions of both the majority and minority shareholders. It also defines the processes to be followed when one is exiting the company or when a new shareholder is being incorporated into the business..

(c) Assists in management and governance issues- The shareholders’ agreement will generally offer clarity on governance and management issues such as the purpose and nature of the business of the company, the duties and powers of the board and the interplay between the roles of the board and the shareholders and their decision making rights;

(d) Define exit and entry procedure- a shareholders’ agreement can encompass provisions governing the processes of allotment or issuance as well as transfer of shares, the roles of the transferee, transferor, the board, shareholders and the company in such processes including prescribing the procedure involved in the valuation of the company and its shares in such transactions.  The shareholder’ agreement can also provide for good and bad leaver clauses which will allow the shareholders to dictate at what price they purchase the shares from a departing shareholder, dependent on their reason for departing.  This can also include definitions of what constitutes a good leaver, such as retirement, and what is a bad leaver, such as breach of duties or misconduct. 

(e) Drag along rights: These are provisions that ensure that if the majority shareholders wish to sell their shares, the minority shareholders must sell their shares as well.  This is meant to prevent the minority frustrating majority when selling their shares as a purchaser may wish to obtain 100% of the share capital in a company.

(f) Tag along rights: As with drag along rights, tag along rights can be included in a shareholders’ agreement to ensure that when the majority shareholders are selling their shares, any shares held by a minority shareholder must be bought also. This is intended to prevents minority shareholders becoming trapped in a company which is controlled by shareholders with whom they may not have a relationship or may not what the business with.

(g) Providing guidance on how to deal with profits and losses as well as a dividend policy- A shareholder’s agreement can prescribe what will be considered when computing profits and losses, when the profits will be distributed and even how to deal with losses in the business. It is also critical for shareholders’ agreement to provide how shareholders are to receive the profits of the business, especially in companies where shareholders have varying shareholdings and this should include the percentage of net profit that must be distributed annually. This provides clarity to shareholders besides preventing disagreements.

(h) Can provide for confidentiality and competition restrictions - A shareholders’ agreement can outline protective measures for the shareholders and the company including protection of the company’s confidential information and trade secrets and restrict directors-shareholders’ from setting up or joining competing business or putting themselves in conflict of interest situations. Such a non-compete provision will often continue in force for a certain time after a shareholder ceases to be a shareholder of the company.

(i) Provides guidance dealing with deadlock situations- A shareholders’ agreement will generally outline the step that can be taken if a deadlock situation occurs, e.g., providing for a gunshot clause, or through meetings and voting systems.

(j) Aids dispute resolution – The shareholders’ agreement will generally outline the dispute resolution mechanisms. 

If your would have help in negotiation, drafting or review of a shareholders’ agreement or practical legal advice on shareholders’ agreement or representation in a shareholders dispute, please feel free to email me via mainacy@gmail.com

Living and Testamentary Trusts

 

Living and Testamentary Trusts

One of the greatest fulfilment for many people is to leave behind a lasting legacy for the loved ones and or for preferred charitable objects. To achieve these objectives, the usage of living and testamentary trusts is inevitable.

In living trusts, the person who create a trust is called the settlor or trust maker.  In testamentary trust, the person who established the trust is not called the settlor but testator or will maker. 

Living Trusts?

I had previously given more information on these types of trusts in my previous article; which can either be revocable or irrevocable living trusts.

As I had explained, a revocable living trusts can be revoked during the testator life time but becomes irrevocable upon the settlor or trust maker’s death. A revocable trust which is intended to close up after the death of a trustmaker but an irrevocable trust can remain up and running indefinitely after the trustmaker’s death.

An irrevocable living trust is more preferable form of living trust and is employed for preservation of assets and creating certain advantages or efficiencies. In relation to assets protection, the trust assets are transferred to a third party (usually a company) and therefore beyond the reach of creditors.

Testamentary Trust?

A testamentary trust (also called trust will) is a trust that is created before the date of effect, which is the death of the person who creates it (usually called testator/will maker). It is often established through a last will and testament.

The testator establishes this trust arrangement under his Will by declaring a trust over all or some assets in his or estate that will be managed or administered by named executor or other named trustee(s) upon the testator’s death for the benefit of some named beneficiaries.

It is also possible to establish more than one testamentary trusts in a Will- usually covering different types of testator’s assets.

A testamentary trust is a preferred estate planning tools where a Will would be insufficient to deal with certain complexities after the death of a testator. These complexities, inter alia, include:

(a)              Minor Child or children;

(b)              Children out of wedlock or dependents;

(c)               Aged Parents; and

(d)              Wasteful/Spendthrift beneficiaries

In the examples given above, it would be prudent to have a testamentary trust inserted in the Will with instructions given to the Executor/Trustee on the welfare of such beneficiaries instead of having the responsibilities for the care, education, medical care or upkeep (as the case may be) placed on the elusive goodwill of some other principal beneficiaries.

Other situations where a testamentary trust may be advisable is where the testator intends to cater for certain unique wishes or objects after his or her demise like:

(a)              Charitable giving;

(b)              Business Management; and

(c)               Property or Asset Maintenance

Charitable Giving

Where the testator is a philanthropist, he or she may intend to establish a testamentary trust for achievement of certain charitable objects after death. These may include faith- based or environmental causes, relief of poverty, educational or sport sponsorship etc. In such cases, a testamentary trust will ensure that these obligations continue being pursue by the executor or other named trustee(s) after the death of the testator.

Business Management

Having built a successful business, the testator may sometimes have children who lack the professional or business experience or acumen to continue running his or her business in a profitable manner. Moreover, these may have different areas of interest and passion that are completely different from that of the testator. In such cases, the testator may wish to establish a testamentary trust over his business or related assets in his or her Will and   thereby procure the executor of his or her Will or other named trustee(s) to continue running such business in a profitable manner after his or her demise for the benefit of named beneficiaries.

Property or Assets Maintenance

Oftentimes, the testator might want to preserve certain property after his or her demise for the benefit of named beneficiaries, and may wish such property or assets not be sold off after his or her death.  Examples here may include; a family or ancestral home, an exotic building, a family graveyard, or other family assets, heirlooms treasures of sentimental value.

In such a case, the testator may establish a testamentary trust under which the subject property or assets care and maintenance would be placed on the executor or some other named trustee(s). Where the property is immovable, the testator may also instruct the executor/trustee(s) to collect rents upon their death and distribute the net proceeds to designated beneficiaries.

Differences Between Living and Testamentary Trusts

As the name implies, a revocable living trust allows the settlor or the trust maker to benefit as a beneficiary from the trust in their lifetime (either alone or together with others), while entirely passing the property to other beneficiaries upon their demise.

Conversely, a testamentary trust only comes into operation after the demise of the testator, and therefore before a testator’s death, a testamentary trust is just a mere declaration.

A Living Trust allows the settlor to bypass the often expensive legal process of probate, since living trust are not subject to this probate process. Nevertheless, a testamentary trust draws its life from the Will and it is consequently subject to the probate court, which oversees the administration of the trust.

Arising from the above, the decision on whether to create a living trusts or a Will with a testamentary trust will be guided or dictated upon by the unique circumstances of your beneficiaries and the specific objects that you wish to achieve in your estate planning. 

Either way, it is a good thing to consider living trusts or testamentary trust as part of your estate planning tools.

Should you require any specific legal guidance on living trust or testamentary trust, or any other estate planning tools, kindly feel free to contact me via mainacy@gmail.com