Directors' Duties under the Companies' Act 2016

Section 2 of the Companies Act 2016 ("Act") provides that a director is defined as any individual occupying the role of a director in a corporation, regardless of the title used. This includes alternate or substitute directors. Directors operate collectively as a board, exercising their authority as outlined in the Act. However, a company may adopt a constitution granting directors broader powers to manage the day-to-day affairs of the company, subject to any restrictions or conditions stated in the Act or the constitution. In the absence of a company constitution, the company must adhere to the rights, powers, and obligations set out in the Act.

Statutory duties of a company under the Act.

1.             Duty to exercise powers in good faith in the best Interest of the company

Section 213(1) of the Act mandates that the powers conferred on a director must be exercised in accordance with the Act, for a proper purpose and in good faith in the best interest of the company. Therefore, the director must be diligent and careful in performing his duties.

2.             Duty to exercise reasonable care, skill, and diligence

Section 213(2) of the Act provides that directors must perform their responsibilities with a standard of knowledge, skill and experience that may reasonably be expected from other directors having the same responsibilities. and with any additional knowledge, skill and experience which the director has. To balance the directors’ accountability with commercial practicality, Section 214 of the Act protects directors from personal liability for decisions made in good faith, with reasonable care, skill, and diligence. It is also important to note that directors’ reliance is considered reasonable if it complies Section 215(2) of the Act.

3.             Prohibition against improper use of property and position

Section 218 of the Act prohibits directors or officers from misusing company property, confidential information, their position, or business opportunities for personal gain or to the company’s detriment, unless such actions are approved or ratified by a general meeting. This provision ensures directors act in the company's best interest rather than for their own benefit. Therefore, a director shall not use his position or information to gain advantage for any other person other than the company, or cause harm to the company.

4.             Duty to make disclosure

Section 219 of the Act requires directors to submit a written notice to the company to disclose particulars relating to the shares, debentures, participatory interest, rights, options and contracts to the company. This requirement promotes accountability, transparency, and safeguards shareholders’ interests.

5.             Duty to avoid conflict of interest

A director must avoid situations where personal interests conflict with company interests. This includes to disclose any direct or indirect interest in contracts involving its company, to not engage in business which is in competition with the company unless consent or ratification of general meeting is obtained, and to not use the company’s property, any corporate information acquired by his position as a director and company’s opportunity which the director is aware of during his tenure as a director at the company.

6.             Duty to maintain proper accounting records

Under Section 245 of the Act, directors and managers of a company must ensure that proper accounting and financial records are maintained, accurately reflecting the company’s financial position. The accounting records must also be readily accessible for auditing and inspection by directors. This provision highlights the importance of directors to ensure that the company’s financial records are accurate and maintained to ensure all financial documents such as profit and loss statements, and balance sheets can be properly audited.

7.             Duty to have statutory audited financial statements 

The directors of every company are obliged to prepare financial statements within eighteen (18) months from the date of its incorporation and subsequently within six (6) months from its financial year end. The circulation of financial statements for a private company shall be within six (6) months of its financial year end while in the case of public company, at least twenty-one (21) days before the date of its Annual General Meeting. However, private companies may extend this period if an application for an extension is submitted before the original deadline expires. For each financial year end, the financial statements must be lodged with the Registrar. In the case of a private company, the lodgement must be made within thirty (30) days from the date of circulation or in the case of a public company, within thirty (30) days from the date of the annual general meeting.

8.             Duty to lodge certificate relating to exempt private company 

In lieu of the lodgment of financial statements with the Registrar, an exempt private company may lodge a certificate relating to its status as an exempt private company within thirty days from the circulation of the financial statements and reports for each financial year.

9.             Duty to prepare annual return 

Directors must ensure that the annual return of the company is lodged with the Registrar for each calendar year within thirty (30) days from the anniversary of its incorporation date. The Registrar may strike a company off the register if the company fails to lodge its annual return for three or more consecutive years. However, this requirement is not applicable in the calendar year in which the company was incorporated. As outlined under Section 68(3) of the Act, the annual return of a company shall contain the following particular: 

Breach of director’s duties and penalties

Directors who breach their duties may face civil and criminal liability. The company or its shareholders can initiate legal action to recover financial losses resulting from the breach. Under Section 347 of the Act, shareholders have the right to file a derivative action on behalf of the company against directors who have violated their duties and obligations. This ensures directors’ accountability towards their wrongful actions. Therefore, it is important for directors to be fully aware of directors’ legal responsibilities and act in the best interests of the company at all times. 

Conclusion

In essence, directors play an important role in managing a company and making decisions that impact the company’s operations, stakeholders, and long-term success. To uphold corporate integrity and avoid potential civil or criminal liability, directors must have a thorough understanding of their legal and ethical duties and responsibilities under the Act. By adhering to such duties and responsibilities, the company shall be able to operate efficiently and uphold corporate governance standards.