The Role of a Director: Key Duties and Responsibilities

Introduction

As many of you know, shareholders form and own a company, but that doesn't mean they run it. On the contrary, every company has officers with distinct roles, responsibilities, and powers to manage the business. The initial directors are appointed by the subscribers to the Memorandum of Association.

Subsequent directors are appointed according to the company's Articles of Association. If the Articles don't specify a method, directors are usually appointed by an ordinary resolution at a General Meeting. While most companies appoint individuals, the Companies Act in Malta also allows for a "corporate director"—where another legal entity holds the position.

Who Can Be Appointed as a Director?

You might be wondering about the prerequisites for the role. Legally speaking, there are no specific requirements for becoming a director of a private company. However, the rules change for public companies listed on the stock exchange.

For listed companies, a director must demonstrate industry knowledge, backed by relevant qualifications or prior experience.

The Companies Act doesn't provide a strict definition of a "director," but it outlines what the term encompasses. Specifically, Article 136A lays out the general duties attached to the role.

The law doesn't offer an exhaustive list of tasks. Instead, it implies that the Memorandum, Articles of Association, and other laws can assign additional responsibilities to directors.

Powers of Directors

Some might argue that giving directors broad discretion is good for business, as it allows for efficiency and smooth management. Others look at it differently: broad discretion can open the door to abuse of power.

Directors aren't just there to manage the company generally. They can also appoint a CEO or form committees made up of one or more directors to handle specific transactions or areas of the business.

Breaking Down the Duties

Let's look at the core responsibilities:

• Fiduciary Duty: A director's primary obligation is to act in good faith and in the best interest of the company. This is crucial. Directors don't owe duties to the shareholders individually, but to the company itself. This duty cannot be overstated: personal interests must never interfere with the management of the company.
• Insolvency Exception: The only exception to the rule above is if the company becomes insolvent. In that scenario, the directors' duty shifts from the company to its creditors.
• General Supervision: Directors are responsible for the administration, proper management, and general supervision of the company. The Companies Act empowers them to handle all company matters, except for specific issues that require a shareholder resolution at a General Meeting (as defined by the Act or the Articles).
• No Secret Profits: A director must not make a profit from their position and must always set personal interests aside to avoid conflict with the company's interests.
• Liability: Directors are responsible for their own acts or omissions, as well as those of their delegates. They are jointly and severally liable for any improper performance or breach of duty.
• Standard of Care: The Companies Act requires directors to perform their duties with a reasonable degree of prudence, diligence, and competence.

Specific administrative tasks often include:

• Convening board meetings and General Meetings
• Filing annual returns and other statutory documents
• Ensuring proper bookkeeping

Fraudulent vs. Wrongful Trading

We've established that directors are liable for their actions. But how do we determine if a director has crossed the line legally?

The Companies Act distinguishes between fraudulent trading and wrongful trading.

• Wrongful Trading typically arises from negligence, lack of experience, or insufficient skills.
• Fraudulent Trading involves a deliberate intent to defraud the company's creditors or anyone else.

To understand how this plays out in the real world, we look to Maltese case law. The Price Club Case is the perfect example. It marked the first time Maltese courts applied the provisions regarding fraudulent trading, even though the directors tried to plead lack of experience as a defence. The court didn't buy it, setting a high bar for director accountability.

Summary

While it might seem like directors have free rein to run the business, there are strict limits to their power. Directors must ensure they always act within the authority granted to them by the Companies Act, the company's Articles, and other relevant laws. It's a role that carries significant weight, and understanding the liability attached is essential for anyone sitting on a board.