The general duty of directors (both individually and as a Board) under Maltese law is to act honestly and in good faith and in the best interests of the company at all times. The implications of this are various and far-reaching. It is therefore imperative for directors on a Maltese company to understand the nature of their role and the significance of their powers and responsibilities vis-à-vis the company on which Board they sit.
This is the first part of a two-part article.
Directors are key in the daily running of a company, and their decisions will inevitably impact the direction towards which the company is steered. This article, which is the first of a two-part article, attempts to provide a high-level outline of the duties and responsibilities of directors of Maltese companies, and in so doing, seeks to highlight the importance of the directors’ decision-making process.
General Responsibilities of directors under Maltese Law
In terms of Maltese law, directors are considered to be “officers” of the company and, as officers, they are subject to a number of duties and obligations. These largely emanate from the Companies Act (Chapter 386 of the Laws of Malta) (the “Companies Act”) which is the main piece of legislation which regulates companies in Malta.
More specifically, directors of a Maltese company are duty-bound to promote the well-being of the company and are responsible for its proper governance, administration and management, as well as the general supervision of its affairs.
The overriding principle is that directors are expected to act primarily in the best interests of the company and for the benefit of its members as a whole, and do not owe their duties to the individual shareholders of the company. This effectively means that in taking board decisions, directors should not be influenced by any power that an individual shareholder or a class of shareholders may have over their appointment, removal and/or replacement.
Directors’ legal duties and responsibilities necessitate that they are independent of the owners of the company so as to be in a position to put the interests of the company before those of the shareholders, where the situation so demands. Accordingly, directors should feel comfortable to discuss all matters which generally concern the company, and to question suggestions put forth by other members of management or the Chairperson himself on any matter that requires a decision. In advance of any decisions taken, directors should insist to be duly informed of the matter at hand so as to be able to assess same on its own merit, and should, where necessary, seek advice from independent professionals on any matters which the directors may not be sufficiently experienced in. What is important is that the directors can make and take an informed decision and not simply ratify past decisions already taken without their collective and prior deliberation. This is especially so in light of the fact that directors can ultimately be held personally liable under Maltese law (as shall be discussed in more detail in Part 2 to this article which will tackle directors’ duties and liabilities in the context of company insolvency).
The duties of directors are therefore clearly far reaching, and the Companies Act makes this clear when setting out the directors’ general duty “to act honestly, in good faith and in the best interests of the company.”
Directors are specifically obliged in terms of Maltese law to exercise the degree of care, diligence and skill which would be exercised by a reasonably diligent person having both –
- the knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by or entrusted to that director in relation to the company; and
- the knowledge, skill and experience that the director has.
In the first place therefore, the director has to satisfy an objective test in satisfying his obligations at law, thus acting in the manner in which any reasonable director in that position should do/have done. Secondly, a director of a Maltese company must also qualify on a personal (subjective) level and must have sufficient personal knowledge, skill and experience to satisfy his position as director in relation to the particular company on which board he sits.
In view of the above, shareholders should ensure that, before appointing any particular individual to act as director on a Maltese company, the proposed person has the required level of integrity, knowledge and ability to act in this capacity for that particular company, also bearing in mind the object for which it was set up.
Similarly, before accepting appointment, it would be prudent of a prospective director to carry out an assessment of the type of business in which the company operates, in order to ensure that he or she is adequately skilled to sit on the board of such company. A prospective director would also do well to assess the other individuals making up the board prior to appointment, so as to ensure that he or she is comfortable with the collective level of expertise making up the board of directors. In regulated entities, this assessment is often independently carried out by the relevant authority, such as the Malta Financial Services Authority or the Malta Gaming Authority.
These afore-mentioned measures of “skill” and “competence" become even more relevant in light of the fact that Maltese law specifically imposes other general duties on directors, namely:
- Not to make secret or personal profits from their position without the consent of the company, nor to make personal gain from confidential company information;
- Not to use any property, information or opportunity of the company for their own or anyone else’s benefit, nor obtain benefit in any other way in connection with the exercise of their powers, except with the consent of the company in general meeting or except as permitted by the company’s memorandum and/or articles of association;
- Not to act in competition with the company;
- To ensure that their personal interests do not conflict with the interests of the company;
- To declare personal interests in transactions or arrangements with the company; and
- To exercise the powers they have for the purposes for which same were conferred, and not to misuse such powers.
Moreover, directors may be considered to be agents of the company, and in terms of Maltese Civil Law “a mandatary [or agent, attorney] is answerable not only for fraud, but also for negligence in carrying out the mandate”.
A director is therefore expected to have a level of experience and knowledge commensurate with the mandate with which he has been conferred, and in case such level of experience and knowledge are absent, he would be held answerable, qua mandatary and agent of the company, for such lack of skill.
Limitations on the powers of directors
Directors may exercise all such powers of the company as are not, by law or through the constitutional documents of the company, required to be exercised by the company in the general meeting. It is therefore common for the board to be endowed with very wide discretionary powers in relation to managing the business of the company. Still, directors are duty-bound to act within, and to observe any limitations on such powers at all times. This means that directors must not act in such a manner or enter into any transaction which is illegal, or which goes beyond the company’s objects in terms of its statutes.
The Companies Act defines the term “director” as including “any person occupying the position of director of a company by whatever name he may be called and carrying out substantially the same functions in relation to the direction of the company as those carried out by a director”. Duties and liabilities of directors under Maltese law may therefore be interpreted to extend to persons who, though not formally appointed as such in terms of law (the de jure directors), actually carry out the same role as one so appointed would (the de facto directors).
Moreover, in some defined instances, Maltese law effectively specifically provides that a “director” may include “any person in accordance with whose directives or instructions the directors of a company are accustomed to act.” Maltese law uses this concept of the shadow director to explicitly extend certain listed duties and liabilities (such as personal liability for wrongful trading) to persons who would not otherwise fit squarely within the above-mentioned definition of “director”. A majority shareholder who has effective control of a company and with whose instructions the directors of the company are accustomed to act, could therefore qualify as such.
This implies that while there is no doubt that the persons formally appointed as directors are entrusted with the powers and duties arising from their office, there may be instances where other persons could also be subject to the same duties (and therefore exposed to the same liabilities), as directors proper – whether they qualify as de facto or shadow directors.
Consequently, when imposing limitations on the responsibilities of directors, whether in the statutes or otherwise, it is important to ensure that the intrinsic role of managing the company actually remains with the directors. While it is not uncommon to reserve certain matters to the decision of the shareholders, such as the entering into of transactions above a certain threshold, it is important to ensure that any such limitations do not effectively result in a situation where a shareholder would be likely to be considered a shadow director due to his or her extensive involvement or influence over company decisions. In such case, the shareholders would need to be aware that they could not only be in a conflictual position, but that they could also be considered to be shadow directors in terms of law.
Although directors are generally given vast powers to manage companies both at law as well as in the statutes of the company, as stated, limitations on their powers are sometimes imposed specifically in the Articles of Association. Interestingly, however, any such limitations may not be relied upon against third parties acting in good faith. Therefore, should directors enter into a contract on behalf of the company with third parties acting in good faith, which contract goes beyond what is permitted by the statutes of the company, the company itself will still be bound to honour the contract.
The law presupposes that the contracting third party is not obliged to verify whether the contract in question is within the company’s power or not - this is the responsibility of the directors. This does not, however, exclude any personal remedies in damages that the company may have against the directors should the company suffer a loss due to the directors’ ultra vires actions. In general, directors of a Maltese company have a fiduciary duty in relation to the company and would therefore be liable to reimburse the company and shareholders for losses resulting from their defaults.
On the other hand, it is questionable as to whether the third parties themselves could contest the transaction on the premise that the director acted beyond his duties. The Companies Act is indeed silent on this point.
Besides the general and fiduciary duties incumbent on the directors of a Maltese company, the Companies Act also imposes a number of specific statutory duties on directors, which apply in respect of each and every company and throughout the course of the company’s lifetime - regardless of the company’s state of solvency or otherwise. These statutory duties relate, inter alia, to:
- The preparation and delivery of resolutions, returns and statutory forms to the Registrar of Companies in various instances as regulated by law;
- The legal compliance of the memorandum and articles of association;
- The maintaining and updating of the company’s internal registers and other records;
- The appointment of the first auditors;
- The preparation and approval of the company’s annual accounts;
- The preparation of a directors’ report for each accounting period;
- The provision of information to the auditors of the company which is necessary for the performance of their duties;
- The proper keeping of statutory registers and minute books;
- The convening of general meetings;
- The liquidation (solvent or insolvent) of the company;
- The cooperation with the Registrar of Companies in the event that the company is being investigated under certain provisions of the Companies Act.
In addition, the law envisages a number of instances where directors and officers of the company are subject to other more specific duties and obligations, which come into play in the event of a company’s possible or actual insolvency.
Evidently, the Companies Act actually imposes quite a plethora of duties (fiduciary and otherwise) on directors of companies which is commensurate with the importance of their governing and managing role within the company. On this note, the regulation of directors’ duties acts as a buffer on the otherwise extremely broad discretion that the board usually has with regard to managing the company. As aptly put in Re D’Jan of London Ltd., “The day of the sleeping or amateur director is over, mere honesty is not enough…” and this is reflected in the numerous duties incumbent on directors of Maltese companies. The onset of insolvency gives rise to additional duties and the very real threat of personal liability of directors which will be explored in Part 2 of our Article.
Krista Pisani Bencini is a Senior Associate at Fenech & Fenech Advocates, Malta: https://fenechlaw.com/people/associates/krista-pisani-bencini/
Sarah Grima is an Associate at Fenech & Fenech Advocates, Malta: https://fenechlaw.com/people/associates/sarah-grima/
Maria Debono is an Associate at Fenech & Fenech Advocates, Malta: https://fenechlaw.com/people/associates/maria-debono/