Directors exercise extensive powers in the management of their companies, influencing their company’s conduct, by virtue of their involvement in the decision making process.
Under Cyprus law, the directors are considered to stand in a fiduciary relationship, with their company, and are subject to specific duties, stemming from their relationship.
The Courts have over the years, construed company director’s fiduciary duties, as being duties to:
• Act in good faith, and for proper purpose;
• Avoid conflicts of interests;
• Retain director’s discretion; and
• Act with due care and skill.
DUTY TO ACT IN GOOD FAITH AND FOR PROPER PURPOSE
Directors must act honestly, and in bona fide. The test is a subjective one - the directors must act in good faith in what they consider – not the court may consider – is, in the best interests of the company.
However, the directors may be still be held, to have breached that duty, where they fail to direct their minds, to the question of whether, in fact a transaction was in the best interests of the Company as a whole.
Directors must exercise their powers for a proper purpose.
Improper purpose exists, when directors are aiming through their decisions, to promote their personal interests, or to direct corporate or investment opportunities to relatives or their companies, to dilute a shareholding of a minority shareholder etc.
LOYALTY AND CONFLICTS OF INTERESTS
Directors also owe strict duties not to permit any conflict of interest, or conflict with their duty to act in the best interests of their Company, as a whole.
As agents and fiduciaries, the directors may not put themselves, in a position where their interests and duties, conflict with the duties that they owe to their company.
The law takes the view, that good faith must not only be done, but must be manifestly seen to be done.
Directors are liable to account for any secret profits, made in the discharge of their duties.
Directors should not act as directors of competing companies, as their duties to each company would then conflict, with each other.
Directors cannot without the consent of their company, fetter their discretion in relation to the exercise of their powers, and cannot bind themselves, to vote in a particular way, at future board meetings. This is so even, if there is no improper motive, or purpose and no personal advantage to the director.
CARE & SKILL
Traditionally the level of care and skill, a director must demonstrate, has been framed largely with reference to a non-executive director. In the English case RE CITY EQUITABLE FIVE INSURANCE CO, it was expressed, in purely subjective terms, where the Court held that:
“a director need not to exhibit in the performance of his duties a greater degree of skill, than may reasonably be expected from a person of his knowledge and experience……….”
However, a more modern approach has been adopted in the English case DORCHESTER FINANCE –V- STEBBING, where the Court held with respect to diligence, what was required was:
“such care as an ordinary man might be expected to take on his own behalf………..”.
In addition to the above general law duties, the directors owe statutory duties, under the Cyprus Companies Laws, such as duty to act in good faith in the best interest of their company and duty to prevent insolvent trading by their company where, for example, a company is insolvent, directors owe a duty to the creditors of the company.
The laws regulating trade practices, taxation, occupational health, and safety, environmental protection etc., also apply to companies. Therefore, director’s decisions, which might cause a company to breach those laws, may give rise to violation of directors duties, to act in the best interest of their company.
TO WHOM ARE THE DUTIES OWED?
Directors fiduciaries duties, are owed to their company as a whole, and not to individual shareholders, creditors employees etc. However in certain circumstances, director’s fiduciary duties, may extend to shareholders (i.e. for example where the directors are involved in the sale of shares of a shareholder) or to creditors (i.e. for example, where a company is insolvent).
REMEDIES FOR BREACH OF DUTIES
In the event of a violation of the above duties, the company – (or any minority shareholder by a derivative action) – may bring an action against the directors for inter alia:
• Injunction to block them for violating their duties;
• Declarations and orders for setting aside the decisions taken;
• Restoration of the Company’s property;
• Cancellation of the relevant contracts; and
• Account of profits.
• Summary dismissal of director.
For further information on this topic please contact Mr. Soteris Pittas at MAGNUMSERVE LTD, by telephone (+357 25 028460) or by fax (+357 25 028461) or by e-mail (firstname.lastname@example.org).
The content of this article is intended to provide a general guide to the subject matter. Specialist advise should be sought about your specific circumstances.