Directors: Civil Consequences Of Breaching General Duties

Director’s shoulder a weighty responsibility to Companies as enshrined in the Companies Act of 2015, which outlines the duties that directors must uphold, ranging from promoting the company's success to avoiding conflicts of interest. What happens when these duties are breached? 

The duties can be found in the Companies Act, 2015 sections 142-147, where directors are obligated to dispense the following duties and responsibilities:  

  1. Duty to act within powers and in accordance with the company constitution; 
  2. Duty to promote the success of the company; 
  3. Duty to exercise independent judgment;  
  4. Duty to exercise reasonable care, skill and diligence; 
  5. Duty to avoid conflict of interest and conflict of duties; and 
  6. Duty to reject benefits/gifts from third parties. 

 In the instance that a Director breaches any of the duties, then civil consequences for the breach should accrue; these are the same in common law and equity. On the other hand, this has an exception in that, the duty to exercise reasonable care, skill and diligence is enforced as a common law duty.  The other general duties of a director are equity-based duties which would be enforced as any other fiduciary duty of the directors to the company. 

Remedies for breach of duty 

Remedies for breach of directors' duties may include: 

Damages - the monetary compensation awarded by a court to a party who has suffered loss or harm as a result of the wrongful act or omission of another party. In Kenya Airways Limited v. Titus Naikuni & Others (2014) the directors of Kenya Airways Limited were sued for breach of their fiduciary duties in relation to their management of the company's affairs. The court found that the directors had engaged in improper conduct, including mismanagement and failure to exercise due diligence. The directors were held personally liable for the losses suffered by the company and were ordered to compensate the company for the damages incurred. 

Restitution - this requires a person who has unjustly benefited from the other party’s action to repay the value of the benefit gained to the aggrieved person. Nation Media Group PLC v. Wilfred Kiboro & Others (2014) involved a dispute between the Nation Media Group PLC and its former director, Wilfred Kiboro. The court found that Kiboro had breached his fiduciary duties by using confidential information obtained during his tenure as a director to compete with the company. Kiboro was ordered to pay damages to the company for the losses suffered as a result of his actions. 

As in Sisimba Holdings Limited v. Kenya Commercial Bank Limited & Another (2016), the directors of Sisimba Holdings Limited were found to have breached their fiduciary duties by misappropriating company funds and entering into unauthorized transactions. The court held that the directors were personally liable for the losses suffered by the company and ordered them to compensate the company for the misappropriated funds.  

Injunctive relief - a court order requiring another party to do or refrain from doing a specific act to prevent irreparable harm or to preserve the status quo pending the resolution of a legal dispute; and/or  

Specific performance - involves compelling a party to perform a specific act or fulfill a contractual obligation as specified in the terms of the contract. 

The company or affected stakeholders may bring an action against the director for breach of duty. 

Repercussions for breach of duty 

Consequences for breach of equity-based director duties have been established in the law of equity and on equitable principles. These are: 

  1. Removal of the director from office - through a vote, the shareholders decide whether to remove the director temporarily or permanently depending on the seriousness of the breach;  
  2. Return of company property - property which has been taken by a director must be returned upon breach of any duties of the director; 
  3. Restitution of profits - a court of law can order that where the company has suffered a loss because a director breached any duty, such a director should pay the company from their personal profits. However, liability may be limited in certain circumstances, such as where the director acted honestly and reasonably or where they relied on professional advice;  
  4. Injunctive reliefs - a court can issue an injunction to prevent further breaches of duties by a director to prevent further losses;  
  5. Setting aside a transaction; - it may be ordered by a court of law that a transaction entered on behalf of the company by a director who is not acting within his powers and duties be set aside. 

How we can help 

The CM-SME Club provides corporate governance services. We provide valuable legal advice and guide businesses on company law to protect the interests of the Company. Contact law@cmsmeclub.com for assistance. 

 

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