In the 1995 Companies Act of Malta (‘the CA’)[1], directors are entrusted with the day-to-day running of affairs of the companies. Any person occupying the position of director of a company – irrespective of the name by which said person is called, and provided that he carries out the same substantial functions with regard to the direction of the company as those carried out by a conventional director – is deemed to be a director for all intents and purposes. In its nature as a legal entity, the company may only act through its directors. Said directors are burdened with fiduciary relationship towards the company and ought to act with the diligence of the reasonable man.
Moreover, directors are also deemed to be mandatories and agents of the company. The duties imposed upon directors by Maltese law may be classified under two categories: those of a general nature laid down in the CA or arising out of the juridical nature of directors under general legal principles and duties of an administrative nature emanating from the CA.
In Section 136A, the CA establishes a standard of conduct applicable vis-a-vis all directors. This provision delineates that the company director ought to act honestly and in good faith, ensuring that any decision or action taken is in the best interests of the company. The duty to act in the best interests of the company encapsulates the obligation to treat the shareholders equally, even in cases where there are different share classes which bring with them a diverse set of rights.
In relation to the ‘best interests of the company’, the CA does not provide any specific definition of what they should entail, leaving its determination at the directors’ discretion. However, it is important that said interests be determined by considering the present situation of a company. Where, for instance, the company is in a state of solvency, the interests of the company are to be considered vis-a-vis the interests of the shareholders.
On the other hand, where a state of insolvency arises, the best interests of the company should be considered vis-a-vis the interests of creditors. When legal proceedings are instituted against a director, the courts would determine, on a case-by-case basis, whether said director would have breached his duties towards the company by failing to act in its best interests.
Furthermore, directors are burdened with fiduciary obligations towards the company. This, essentially, means that directors owe a duty to protect and promote the well-being of the company, in line with their obligation to act in its best interests.
Directors are also responsible for the general governance of the company, ensuring that it is adequately administered and managed.
The CA does not distinguish between executive and non-executive directors, meaning that they are equally responsible to ensure that the company is maintained and kept in good order, as mandated by the provisions of the same. That being said, there are instances where a company distinguishes between these two categories of directors in its Memorandum and Articles of Association (‘M&A’)
Moreover, directors are obliged to exercise a degree of care, diligence and skill exercised by a reasonably diligent person who has the knowledge, skill and experience reasonably expected out of a person carrying out identical functions as those carried out by, or entrusted, to that director vis-a-vis the company and the actual knowledge, skill and experience said director has.
While the objective test delineates that a director must have the knowledge, skill and experience which may be expected of a person carrying out the same functions as that of a director, the subjective test specifies that the knowledge, skill and experience with which the director carries out his duties is the main port of call.
The nature of the role of director means that the director is considered as mandatory of the company and, vis-a-vis their dealings with third parties, as an agent. It is expected that directors are adequately informed about the daily affairs of the company so as they may be immediately aware if a situation of distress occurs. This enables them to address any such situation in an efficient and time-friendly manner.
Moreover, it is imperative to note that a director is specifically prohibited from making any secret or personal profits as a result of their position, without first seeking the consent of the company and its shareholders. A director is also prohibited from making any personal gain from confidential information about the company.
Furthermore, a director must make sure that his personal interests are not in conflict with those of the company and no use of any property, information or any other object pertaining to the company for their own benefit or for the benefit of anyone else may be made. Benefits a director may obtain in connection with the exercise of their powers may only be obtained with the consent of the company in a general meeting or if provided for in the M&A of the company.
In conclusion, the duties of a directors of companies in Malta are vast. The CA, by burdening directors with such obligations vis-a-vis companies, ensures their smooth running and the protection of the companies’ best interests, together with those of shareholders and creditors, depending on the situation in which the company would be.
Author: Karl Cauchi
For any additional information or assistance in Corporate Law please contact Dr Josef Cachia Fenech Gonzi.
[1] Cap. 386 of the Laws of Malta