Directors have powers to take majority business decisions on behalf of the companies. Consequently, various duties are imposed on them, to ensure that the companies' interests are protected.
The duties of a director can be subdivided into three categories:
- Statutory duties imposed by the Companies Law, Chapter 113:
- keeping of proper books, records and accounts
- laying the accounts before the general meeting
- convening of annual general meeting and extraordinary general meetings
- delivering approved and signed accounts to the Registrar of Companies
- maintaining certain statutory registers
- Duties of good faith, derived from their fiduciary nature, i.e. a director is under a fiduciary duty to act in good faith and in the interests of the company.
- Duties of skill and care, derived once again from their fiduciary nature, i.e. the director must exhibit the same level of skill and care in the performance of his/her duties as he/she would be expected to exhibit in the conduct of his/her own affairs.Directors' duties including duty to act in good faith to the best interest of the company; duty to avoid conflicts of interest; duty not to profit from their offices, and duty of care and skill are enshrined in the common law rules and equitable principles and also in statutes such as the Company Law of Cyprus Cap 113.
The powers of the Directors are normally derived from the constitution of the company, i.e. its memorandum and articles of association.
The Law imposes a duty to act in the way a director considers, in good faith, would be most likely to promote the success of the company. Although this duty is still owned to the member as a whole, when exercising this duty the director is required to have regards to various non-exhaustive list of factors including the long term consequence of the decisions as well as the interests of the employees; the relationships with suppliers, customers; and the impact of the decision on community and environment; the desirability of maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the company.
A director of a company is expected to exercise the same level of care, skill and diligence as he carries out any other functions in deciding which factors he will take into consideration when making a decision subject to his overall responsibility to the success of the company.
A director must first exercise a judgment and secondly he must exercise the judgment independently. Prima facie, this rule would impinge on so-called -sleeping directors- who play no active role in the management and leave decisions to others. By analogy, this would impact on shadow directors.
Duty to avoid conflicts of interest. This duty applies to a transaction between a director and a third party, such as the exploration of any property, information, opportunity. In other words, the duty does not extend to a transaction between a director and his own company, in respect of which, different rule applies which requires a director to declare his interest to the other directors.
This duty might impact on a director who holds multiple directorships and discourage a director to hold especially non-executive directorships. On the other hand, it should be noted that the saving provision, i.e. authorization by non-conflicted directors on the board goes some way towards easing the concerns.
Duty not to accept benefits from third parties- This reinstates the existing rule known as non-profit in that a director is not permitted to accept a benefit from a third party by reason of (a) his being a director or (b) his doing or not doing anything as a director.
Benefits cover both monetary and non monetary including for example, non executive directorship and even corporate entertainment. However, a director will not be in breach of this duty if the acceptance of such benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
Further, disclosure must be made where a director is considered reasonably to be aware of the conflicting interest.
In the light of the above, it is suggested that directors continue to seek advice if unsure and in the meantime overhauling their decision making process and companies constitutions so as to minimize the risks of derivative claims and other potential legal challenges.
