The duties of director under Kenya law are usually considered under two broad categories, namely: -
(i) Duties of care, skills and diligence.
(ii) Fiduciary duties.
(1) Duty of Care, Skill and Diligence
Directors under Kenya laws
should carry out their duties with reasonable care and exercise such
degree of skill and diligence as is reasonably expected of persons of
their knowledge and status. The directors are not liable for mere errors
of judgment.
Case Law: Brazilian Rubber Plantation Estates Ltd (1911)
In
this case, the directors of the company decided that the company should
invest in some rubber estates in Brazil. They accordingly issued a
prospectus inviting members of the public to come forward and subscribe
for the shares and debentures of the company, the purpose of invitation
being to raise money from the subscription in order to finance the
rubber estate project.
In
the prospectus they declared to the prospective investors that the
project in question for which subscription were being invited was viable
or had potential success. Soon after subscription the project turned
out to be a failure and the company was wound up.
The
subscribers brought an action against the directors for inserting a
misleading/false statement in the prospectus upon which they had relied
or acted upon to their detriment. In their defense, the directors
claimed that they had acted in good faith.
It
was held that the directors were not liable because they had made an
error of judgment about viability of the project and in making the
judgment, they had applied the care and skill that men of experience
were expected to apply.
Where
a director makes an error of judgment, he will be absolved from any
liability so long as the judgment he made or decision he took and
considering all surrounding circumstances came from past experiences and
knowledge which he had; but if a director fails to exercise due care
expected of him in the exercise of his duties, he is guilty of
negligence.
Standard of Care
The standard of care, skill and diligence depends upon the nature of the company’s business and the circumstances of the case.
The standard of care under Kenya law depends upon:-
(i) The type and nature of work.
(ii) Division of powers between directors and other officers.
(iii) General usages and customs in that type of business.
(iv) Whether directors work gratuitously or remuneratively.
Case Law: City Equitable Fire Insurance Co. Ltd
The
directors of insurance company left the management of the company’s
affairs almost entirely in the hands of B, the managing director. Owing
to B’s fraud, a large amount of company’s assets disappeared. B and
the firm in which he was a partner had taken a huge loan from the
company and the cash at the bank or in hand included £7,300 in the hands
of the company’s stockbrokers, in which B was a partner. The directors
never inquired as to how these items were made up.
It was held that the directors were negligent, though the articles protected them from liability.
Romer
therefore observed that “in ascertaining the duties of a director, it
is necessary to consider the nature of the company’s business and the
manner in which the work of the company carried out amongst the
directors and other company officials”.
In
Dovey vs. Cory, a director was held not liable for negligence merely
because he had failed to verify false information regarding the
company’s accounts which he had been given by the company’s manager and
managing director.
The
court stated, “The business cannot be carried on upon principles of
mistrust. Men in responsible positions must be trusted by those above
them, as well as by those below them until there is reason to distrust
them. We agree that care and prudence do not involve distrust”.
(2) Fiduciary Duties
As
fiduciaries, the directors must: -
(a) Exercise
their powers honestly and bonafide for the benefit of the company as a
whole. But if for example the power to issue further shares is
exercised by the directors, not for the benefit of the company but
simply and solely for their personal aggrandizement and to the
detrimental of the company, the court will interfere and prevent the
directors from doing so.
(ii) Not to place themselves in a position in which there is a
conflict between their duties to the company and their personal
interests. They must not make any secret profit out of their position
and if they do, they have to account for it to the company.
Case Law: Cook vs. Deek (1916)
Three
directors of a company obtained a contract in their own names, under
the circumstances which made it breach of trust by them, and constituted
themselves trustees of the contract of the company. By their votes as
holders of ¾th of the shares, they induced the company to pass a
resolution declaring that it had no interest in the contract.
It
was held the directors were liable to account to the company for the
profit they made on the contract as in equity, it belonged to the
company.
Case Law: Regal Hastings Ltd vs. Guilliver (1942)
R.
Co. Ltd owned one cinema and wanted to buy two others with a view to
selling the three together. It formed a subsidiary company to buy the
two cinemas. It was however unable to provide the necessary finances.
As such, its directors themselves subscribed for some of the shares in
the subsidiary company. The cinemas were acquired and the shares in R
Co. Ltd and the subsidiary sold at a profit.
It
was held that the directors must account to R. Co. Ltd for the profit
they made because it was through the knowledge and opportunity they
gained as directors of R.Co. Ltd, that they were able to obtain the
shares.
Case Law: Burland vs. Earle (1902)
Burland,
a director of a company, bought a property for £21,564 at a public
auction. He subsequently sold it to the company for £60,000. The
shareholders brought an action against Burland for restoring the profit
made by him out of resale of the property to the company.
It
was held that Burland was not liable to pay to the company the profit
made by him because there was no evidence whatsoever of any mandate to
Burland to purchase on behalf of the company, or that he was in any
sense a trustee for the company of the purchased property.
But
where a director is under mandate to purchase some property for the
company, he is in a sense a trustee for the company of the purchased
property. If he purchases the property in his own name and then sells
it to the company at a higher price thus making a profit, he is liable
to account to the company the profit earned.
(3) Duty of Disclosure
Except
with the consent of Board of Directors, a director or his relative or
any firm in which he is a member or a director, shall not enter into any
contract with the company for the sale, purchase or supply of goods.
Even in case of urgent necessity contracts, consent must be obtained.
It is the duty of the director to disclose to the Board the nature of
his interest in any contract or arrangement entered into
(4) Duty to act honestly
A director must not act in manner trying to make personal gain out of a transaction in the name of the company.
(5) Meetings of the Board
A director is not bound to attend all meetings, but he should obviously attend as many as possible.
(6) Delegation of Authority
A director has duty not to delegate his functions except to the extent authorized by the act or the constitution of the company.
Can a director be liable for the mistakes of his colleagues?
A
director absented himself from Board meetings for 20 years and during
this period, his colleagues paid dividends out of capital. The
shareholders brought an action against this particular director arguing
that by absenting himself, he was acting negligently because had he been
attending the meetings, he would have discovered that dividends were
being paid out of capital.
It was held that this director was not negligent in absenting himself unless there were circumstances warranting non-abstention.
Exceptions to this Rule
Whether
a director must attend a Board meeting or not is a question of fact.
His compulsory attendance depends on the exigencies of the company’s
life. If he is a member of committee of the Board, he must attend or is
reasonable expected to attend meetings of that committee to deliberate
on issues at hand because by being placed in that committee, his input
is considered important.
If a director is so expected to attend but he fails, then such a director is negligent.
Can a director be allowed to delegate?
The
directors are bound by the principle “delegates no potest delegata”,
that is, a delegate cannot sub-delegate- even then, the exigencies of
business allow a director at times to delegate his duties, though he
cannot delegate all his duties.