A company acts through two bodies of people – its shareholders and its board of directors. The Companies Act, Chapter 386 of the Laws of Malta, empowers a director who is elected or appointed by a company’s shareholder to manage the company’s business and affairs, saving anything that requires a shareholders’ resolution at a general meeting, as established in the Companies Act itself or through any provisions in the Memorandum and Articles of Association. Thus, the role of a company director is to participate in board meetings so as to enable the board to reach strategic and operational decisions and ensures that the company’s objectives are fulfilled.
The Companies Act imposes fiduciary obligations on company directors to perform their duties with a degree of care, diligence and skill. These obligations are mainly set out in Article 136A of the Act which include amongst others, that company directors are to:
At any rate, the law indirectly provides that the Memorandum and Articles of Association as well as the Companies Act itself and any other applicable law, may assign further duties to a company director.
Apart from the duty to administer the day-to-day running of the business, company directors may also have the power to appoint a managing director or committees consisting of one or more of the existing directors to administer certain business transactions within the company.
One of the salient and key responsibilities of directors is to act in bona fide, that is, to always act in the best interest of the company. This principal duty is the ultimate sanction since directors owe no duties to the shareholders, but rather to the company itself. It is imperative that their personal interests must never intermingle with those relating to the administration and management of the company.
Directors are held accountable for any act or omission that results from their actions or omissions, including those of any of their delegates. They are liable, jointly and severally, for any inappropriate performance or any breach of a duty assigned to them.
As aforementioned, company directors are duty bound to exercise proper diligence, care and skill as requested by law when acting as company directors. A breach of these duties would lead directors to be personally liable.
To this effect, company directors that are in breach of their duties may be liable, in terms of the Companies Act, of Fraudulent and/or Wrongful Trading. Article 315 of the same Act explains that Fraudulent Trading occurs in those instances when the action or omission of the company director was carried out with the intent to defraud the creditors of the company. Company directors would face civil and criminal sanctions if liable of fraudulent trading. In such instances, the person found to have been a party to the fraud is not only facing criminal charges but would also be liable for all or any of the debts or other liabilities of the company.
Wrongful Trading in terms of Article 316 of the Companies Act, occurs when a director acts with negligence and lack of skill and experience, when the director knew or ought to have known that there was no reasonable prospect that the company would avoid being dissolved due to insolvency.
Wrongful Trading, unlike Fraudulent Trading is not a criminal offence and therefore no intent needs to be established. However, the company’s directors would be held liable if they continued to trade, incurring liabilities when they knew or ought to have known that the company was in an insolvency state and should have ceased trading altogether. Nevertheless, the same provision exonerates such persons from being held accountable for such an offence, so long as he/she proves that the offence was committed without his/her knowledge and that he/she exercised all due diligence to prevent the commission of that offence.
In light of the above, some might argue that such wide-ranging discretionary powers afforded to company directors promote efficiency and effortless management, thus rendering their functions advantageous. Nevertheless, some might view such wide-ranging discretionary powers as a possible vortex which may lead and give rise to an abuse of power. Thus, one may conclude that the situation vis-à-vis company directors and their functions can be assimilated to a double-edged sword and for that reason the law regulates their duties and imposes certain sanctions if the directors fall out of the remit of their duties or do not execute their duties to the best of their abilities, so as to create a balance between the aforementioned perspectives.
