Directors of a company
Directors manage the company's business as a board. They must act in good faith in the company's interests, with reasonable care, and disclose their interests.
Who directors are
A director is a member of the board, the body that manages, or supervises the management of, the company's business and affairs. Directors act as agents of the company and stand in a fiduciary position (a position of trust) towards it. The first directors are named in the application for registration and must consent in writing. Later directors are usually appointed by ordinary resolution of the shareholders, unless the articles say otherwise. The board may appoint a managing director or chief executive. Listed companies must also follow the Colombo Stock Exchange rules on independent directors.
Who cannot be a director
- A person under 18 years of age.
- An undischarged bankrupt.
- A person of unsound mind.
- A person disqualified by a court, for example for fraud or misconduct in company affairs.
- A company or other body corporate: a director must be a natural person.
- Anyone who does not meet extra qualifications set by the articles.
Duties of directors
| Duty | Meaning |
|---|---|
| Good faith | Act in good faith and in what he believes to be the company's interests |
| Proper purpose | Use powers only for the purposes for which they were given (a general fiduciary duty) |
| Comply with the Act and articles | Not act, or let the company act, against the Companies Act or the company's articles |
| Care and skill | Not act recklessly or with gross negligence; use the skill and care expected of a person of his knowledge and experience |
| Disclose interests | Declare any personal interest in a company transaction; it is entered in the interests register |
| Confidentiality | Not use company information for personal benefit |
| Duty on insolvency | If he believes the company cannot pay its debts as they fall due, call a board meeting at once to decide whether to apply for winding up or carry on |
| Serious loss of capital | If net assets fall below half of the stated capital, the board must call an extraordinary general meeting of shareholders |
Powers and liabilities
- The board exercises the company's powers, except those the Act or articles reserve to shareholders.
- Major transactions, involving a large part of the company's assets, need shareholders' approval by special resolution.
- The board may delegate work to committees, a managing director or employees, but stays responsible.
- A director who breaches his duties can be made to compensate the company and may be removed or disqualified.
- Directors can be personally liable for fraudulent trading, false statements in a prospectus, and some failures to keep records or file returns.
Executive and non-executive directors
The boards of listed companies such as John Keells Holdings PLC include independent non-executive directors, as Colombo Stock Exchange rules require. A director of a small Kandy company who believes it cannot pay its debts must at once call a board meeting to decide whether to seek winding up; if he keeps trading on credit instead, he may be made personally liable for creditors' losses.
Short answer: “Who is a director of a company?” A person appointed to the board, which manages or supervises the management of the company's business; an agent of the company in a fiduciary position.
Structured question: “State the persons who are disqualified from being directors.” Persons under 18, undischarged bankrupts, persons of unsound mind, persons disqualified by court, bodies corporate, and those failing qualifications in the articles.
Essay: “Explain the duties of directors under the Companies Act No. 7 of 2007.” Define a director and the fiduciary position; explain good faith, proper purpose, compliance, care and skill, disclosure of interests, confidentiality, and the duties on insolvency and serious loss of capital; consequences of breach.
Directors' duties G-P-C-S-D-I-L: Good faith, Proper purpose, Comply, care and Skill (never reckless), Disclose interests, act on Insolvency, report serious Loss of capital.