Cyprus Companies Law (Cap. 113) provides that every private company shall have at least one director and every public company shall have at least two directors (s.170). Furthermore, every company must have a secretary and a sole director shall not also be secretary. However, in the case of a single-member private liability company the sole director can also be the company secretary (s.171).
According to section 174 of Cap.113, the acts of a director or manager are valid notwithstanding any defect which may afterwards be discovered in his/her appointment or qualification. Since directors have significant decision making authority, several duties are imposed on them in order to guarantee that the companies’ interests are well-protected.
Duties of Directors:
- Fiduciary Duty
- Duty to exercise skill and care
- Statutory Duties
It should be clarified that there is no difference in principle between executive, non-executive or nominee directors. Have in mind that the duties owed by the Directors are owed to the company and not to individual shareholders.
Fiduciary Duty:
According to the Law, a Director owes a duty to the company to act in good faith and in the best interests of the company. This duty is known as the ‘fiduciary duty’. In other words, the director is obliged to promote the profitability of the company and protect company’s interest.
The principal duty of the director is to act in the best interests of the company as a whole, and that is usually taken to denote the interest of shareholders both present and future.
In practice, the fiduciary duty can be explained as follows:
- Directors shall act in good faith in what they consider to be the interests of the company.
- Directors must act in accordance with company’s constitution, i.e. the memorandum of articles and association, and shall exercise their powers only for the purposes allowed by law.
- Directors must not use company property, information or opportunity for their own or anyone else’s interest, unless allowed to by the company’s constitution or in particular cases where such use has been disclosed to the company in general meeting and the company has approved it.
- Directors shall not agree to restrict their powers to exercise an independent judgement. Nevertheless, if they consider in good faith that this it is in the interests of the company for a transaction to be entered into, they may restrict their powers to exercise an independent judgement by agreeing to act in a precise way to attain this.
- In case there is a conflict between directors’ interests or duties and the interests of the company, then directors are obliged to account to the company for any benefit they receive from the transaction. Nonetheless, directors are not obliged to account for the benefit if they are allowed to have that interest by company’s constitution, or the interest has been disclosed and approved by the company in general meeting.
- Directors must act fairly as between the members of the company.
- In the course of a winding up of a company it appears that directors continue to allow a company to incur credit even though they knew or ought to have known that the company had no reasonable prospect of paying, then following the sections 307 and 312 of Cap.113, they may become personally liable for that credit unless they can prove that they have taken every step, in order to minimise and/or eliminate the possible loss.
Duty to exercise skill and care:
The modern approach to the duty of care is defined in Re D’ Jan of London Limited [1993] B.C.C. 646, a leading English company law case related to directors’ duty of care. ‘The conduct of: a reasonably diligent person means a person having both (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has’.
However, the absence of clear authority makes it difficult to define exactly what the above definition entails. The first part of the definition indicates an ‘objective’ or a ‘benchmark’ test of what ‘the reasonable person’ might expect of a director in specific circumstances. The second part of the test requires that in case that particular director has a particular skill or level of experience, then he/she is obliged to exercise that particular skill in addition to the benchmark test.
Statutory Duties:
Directors have several statutory duties imposed by the Companies Law and other legislation, i.e. the Income Tax, VAT, Customs& Excise Legislation, Health and Safety, and Environmental legislation.
The statutory liabilities imposed under the Companies Law to directors regarding the company, its shareholder or to the public are:
- Register of Directors and Secretary (s. 192);
- Register of Directors interests (s. 187);
- Disclosure of payment for loss of office made in connection with transfer of shares in company (s.185);
- Disclosure of interests in contracts (s.191);
- Loans to directors (s. 188-189);
- Prospectus offers (s.31-.39);
- Pre-emption rights /Transfer of shares (s.71 – 82);
- Fraudulent trading (s.311);
- Profit and loss account and balance sheet (s.142);
- Falsification of books or destroying company documents (s.308);
- Duties antecedent to or in course of winding up (s.207, s. 213);
- Directors report and annual return (s.151);
- Financial Statement available for review and investigation (s 141);
Have in mind that:
Pursuant to Companies Law, breach of director’s duties is a criminal offence with penalties ranging from a default fine to two years imprisonment. Moreover, the directors are liable to personally compensate the company in respect of any loss caused by the breach of their duties. Regarding tax-related offences, directors may be liable for prosecution by the Inland Revenue or Customs& Excise Department.
Our services:
The legal team of Michael Chambers & Co.LLC is able to provide you with efficient and cost-effective solutions. Our team comprises business-oriented individuals able to fully understand your needs and assist you to achieve your business goals. If you wish to speak to one of our Cyprus lawyers, in absolute confidence, then please contact us: info@chambers.law
