Directors: Appointment, Duties and Disqualification

Directors: Appointment, Duties and Disqualification

Syllabus tag: KASNEB CPA | Intermediate Level | CA21 Company Law | Topic 5 Directors: Appointment, Duties and Disqualification

Lesson objectives

By the end of this topic, you will be able to:

• State how directors are appointed and removed
• Distinguish the types of director recognised in law
• State and apply the seven general duties in the Companies Act 2015
• Explain the consequences of breach
• Describe the grounds and effect of disqualification

Why this matters

Before the Companies Act 2015, directors' duties in Kenya rested on case law. The Act put seven of them into statute at sections 142 to 147, and an examiner will expect them named and applied rather than described loosely.

Types of director

Type	Description
De jure	Validly appointed and registered
De facto	Acts as a director without valid appointment
Shadow	A person on whose instructions the board is accustomed to act
Executive	A director who is also an employee
Non-executive	Brings independent judgement; not involved in daily management
Alternate	Appointed to act in another director's absence, where permitted

De facto and shadow directors owe the same duties as validly appointed ones. A person cannot escape the obligations by avoiding the formalities — which is the point of extending the definition.

Appointment and numbers

• A private company must have at least one director
• A public company must have at least two
• At least one director must be a natural person, though corporate directors remain permitted
• The first directors are named on incorporation; later ones are appointed as the articles provide, usually by ordinary resolution or by the board

An undischarged bankrupt may not be appointed, nor may a person disqualified in Kenya or in a foreign jurisdiction.

Removal

A director may be removed by ordinary resolution — a simple majority — before the end of their term, regardless of anything in the articles or in their service contract.

Safeguards apply. Special notice is required, the director must be sent a copy, and the director has a right to protest against removal under section 141: to make written representations and to be heard at the meeting.

Removal does not extinguish any claim for damages for breach of the service contract. A company may lawfully remove a director and still owe them compensation.

The seven general duties

Section	Duty
142	Act within powers — in accordance with the constitution, and only for proper purposes
143	Promote the success of the company for the benefit of the members as a whole
144	Exercise independent judgement
145	Exercise reasonable care, skill and diligence
146	Avoid conflicts of interest
147	Not accept benefits from third parties
151	Declare an interest in a proposed or existing transaction

Section 143 is the central duty. In promoting the success of the company, a director must have regard to the long-term consequences, the interests of employees, relationships with suppliers and customers, the impact on the community and environment, the company's reputation, and the need to act fairly between members.

Note who the duty is owed to. Directors owe their duties to the company, not to individual shareholders, and not to creditors — except that where the company is insolvent or nearly so, the interests of creditors come to the fore.

Section 145 applies a dual standard. The care expected is that of a reasonably diligent person with:

• the general knowledge, skill and experience reasonably expected of someone in that role — an objective minimum, and
• the actual knowledge, skill and experience that this director has

A qualified accountant on a board is therefore held to a higher standard than a lay director, because the second limb raises the bar for anyone who possesses more. Ignorance excuses less the more expert the director is.

:::checkpoint A non-executive director who is a practising CPA fails to notice an obvious accounting irregularity that a lay director might have missed. Explain how section 145 applies to her, and whether her non-executive status assists. :::

Conflicts and declarations

Section 146 requires a director to avoid situations where personal interests conflict, or possibly may conflict, with the company's. Note the width: a possible conflict engages the duty.

Section 151 requires a director to declare the nature and extent of any interest in a proposed or existing transaction, before the company enters into it where possible. The declaration is made to the other directors, in writing or at a meeting, and a general notice of interest in a particular company may suffice.

Declaring an interest is not the same as being released from the duty. It makes the conflict known; whether the transaction proceeds is a separate question for the board or the members.

Consequences of breach

Section 148 makes the consequences the same as those that would apply at common law:

• Damages where the company suffers loss
• Account of profits where the director has gained
• Rescission of a contract entered into in breach
• Restoration of company property
• Injunction to restrain a threatened breach

Members may ratify a breach by resolution, with the votes of the director concerned and any connected member disregarded. Ratification cannot cure everything — it cannot make lawful an act that is itself unlawful or that defrauds creditors.

Disqualification

A court may disqualify a person from acting as a director on grounds including:

• Conviction of an offence connected with the management of a company
• Persistent breaches of company legislation, such as failure to file returns
• Fraud or breach of duty discovered in liquidation
• Being an unfit director of an insolvent company — here the court has a duty to disqualify, not merely a power
• Being an undischarged bankrupt

A disqualified person who nonetheless acts becomes personally liable for the company's relevant debts. The register of disqualification orders is public.

:::checkpoint A director signs a contract that is within the company's constitution but is intended to entrench his own control of the board rather than to benefit the company. Identify which duty is breached and explain why acting within the constitution is not a defence. :::