Last Updated on December 7, 2020
The Duties of Directors
The duties of directors under Maltese law can be classified under two categories:
- those of general nature laid down in the Companies Act[1], CAP 386 of the Laws of Malta or as arising out of the juridical nature of directors under general principles of law; and
- duties of administrative nature that emanate from the CA.
Acting in Good Faith and in the Best Interests of the Company
The intent of the introduction of Section 136A of the CA was to establish a common standard of conduct for all directors. Directors of a company are bound to act honestly and in good faith and in the best interests of the company[2]. This implies that directors owe their duties to the company in every decision and action which they take. The duty to act in the best interests of the company for instance, normally includes also the requirement of directors to treat shareholders equally, notwithstanding the existence of different classes of shares which attach to them different sets of rights. In such a case, it has been held that “fairness does not always require identity of treatment”[3]. Moreover, the company’s best interests are to be determined in accordance with its current situation. For instance, in a state of solvency the interests of the company are equated solely with the interests of its shareholders and in case of insolvency solely with those of its creditors.
The CA however, does not define the expression the ‘best interests of the company’ and the matter is thus left to the directors of the company to determine and make their utmost to fulfil such obligation. When legal actions are brought against directors, it is then up to the courts which are called upon to give a decision on a case by case basis, on whether a director has breached his duties towards the company by failing to act in the best interests of the company.
Directors are also deemed to have fiduciary obligations[4] towards the company and must act as a bonus pater familias. Seeking the best interests of the company therefore leads to the obligation of directors to fulfil their fiduciary duties[5] towards the company. The concept of “fiduciary” was introduced in Maltese legislation in 2004, precisely in Section 1124A and Section 1124B[6]. The term “fiduciary” is defined as a person who “owes a duty to protect the interests of another person” and “…holds, exercises control or powers of disposition over property for the benefit of other persons”.
The directors of a company shall promote the well-being of the company and shall be responsible for the general governance of the company and its proper administration and management[7] and the general supervision of its affairs[8]. The law does not seem to make a distinction between executive and non-executive directors and this means that they are all equally responsible to maintain the company in good order in accordance with the Companies Act. However, some companies do make such distinction in the Memorandum and Articles of Association of the company.
Degree of Care, Diligence and Skill
Directors are obliged 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[9] and the knowledge, skill and experience which the particular director actually has. According to the objective test a director must have 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 – in other words, the performance of the director is to be assessed in accordance to the standards that a director carrying out the same functions in a company in the same line of business, would reasonably be expected to perform. On the other hand, in accordance to the subjective test, the knowledge, skill and experience that the director has to achieve in the carrying out of his duties refers to the knowledge, skill and experience which the particular director actually has. Therefore, a well-qualified and experienced director is expected to perform in accordance to the standards of a similarly qualified director.
Due to the nature of the role of the director, traditionally, directors have been regarded as mandataries of the company and agents, vis-à-vis their dealings with third parties[10]. Directors are expected to be informed of what is going on in the company in a way that they will immediately become aware if the company is in distress and they will be in a position to address such situations efficiently and in a proper and timely manner.
Profit or Gain, Conflict of Interest and Misuse of Power
Directors shall not make secret or personal profits from their position without the consent of the company, nor make personal gain from confidential company information[11]. Moreover, directors should ensure that their personal interests do not conflict with the interests of the company[12]. Directors shall not 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 the exercise of their power, except with the consent of the company in a general meeting or except as permitted by the company’s memorandum and articles of association[13]. Directors are to exercise the powers they have for the purposes for which the powers were conferred and shall not misuse such powers[14].
Moreover, directors shall promote the well-being of the company and shall be responsible for the general governance of the company and its proper administration, management and supervision of its affairs[15].
With such duties and responsibilities come potential liabilities for breach of those duties as set out in the law, including potential civil and criminal liabilities.
Breach of the General Duties
Indeed, it is only the company that may enforce these duties since the company has a separate a distinct personality from that of its members. In Emanuel Chircop pro et noe vs Carmel sive Charles Busuttil et[16] the court held that it is the company which has the right to proceed against its directors who represent it and act in its name. In this context, ‘the company’ essentially refers to the a collective action by the shareholders by virtue of a resolution taken at a general meeting of the company and given effect through the board of directors or in exceptional circumstances, a minority shareholder acting through the derivative action envisaged in Section 402 CA.
As a general rule, the liability of directors for breach of duty is joint and several[17] since the purpose of the of the board of directors is precisely to act collectively as a board and consequently, the corresponding liability for any breach of duty shall be borne in solidum.
There are exceptions to this rule, for instance when a duty has been entrusted to one or more directors. In such case, only such director or directors are held personally liable in damages. However, a director shall not be held liable for the actions of his co-directors, if he proves that he was unaware of the breach before or at the time of its occurrence and that on becoming aware he signified his dissent[18] in writing or took all reasonable steps to prevent it[19].
Moreover, a person who occupied the office of director in the past, remains liable for any breach of duty committed during the period that he held office, that is, from the date of his appointment until the date on which he vacates his office.
Furthermore, any provision, whether contained in the memorandum and articles of a company or in any contract with a company, exempting or indemnifying any officer from liability resulting from breach of duty, negligence or default, shall be void[20].
Personal Liability of the Director
The concept of Separate Legal Personality for corporate entities is well established under Maltese Law. However, recent case law clearly indicates that directors can be held personally liable for acts of the company in certain circumstances, primarily in the context of wrongful trading and fraudulent trading.
Liability for Fraudulent Trading
Fraudulent trading can be defined as an insolvency law concept where business has been carried on with the intention to defraud creditors.
For more detailed information on this please refer to https://mbr.mt/duties-of-directors-during-insolvency-likeliness-of-insolvency
Liability for Wrongful Trading
Liability for wrongful trading under article 316 CA arises where the company ‘has been dissolved and is insolvent’ and the liquidator can show that the director whom he alleges engaged in wrongful trading, ‘knew, or ought to have known prior to the dissolution of the company that there was no reasonable prospect that the company would avoid being dissolved due to its insolvency’. Liability under article 329B(9) CA, arises where ‘a company recovery procedure is in force’ and the special controller can show that the director ‘knew, or ought to have known, that the company is unable to pay its debts or is imminently likely to become unable to pay its debts’. In this regard, French, Mayson and Ryan hold that there can only be wrongful trading if there is no reasonable prospect of the company not going into insolvent liquidation and where there is a reasonable prospect that the company will not go into insolvent liquidation, liability for wrongful trading does not arise.
For more detailed information on this please refer to https://mbr.mt/duties-of-directors-during-insolvency-likeliness-of-insolvency
Liability for Failure to Keep Proper Accounting Records
Failure by directors to maintain proper accounting records to be available for inspection during time of financial distress of the company, exposes them to criminal liability[21]. This liability arises where the company is dissolved and it is shown that at the moment of its dissolution it was unable to pay its debts. Such omission will expose the director to liability if accounting records throughout the period of two years immediately preceding the dissolution or the period between the registration of the company and the dissolution, whichever is the shorter, were not kept. The Director will then have to satisfy the court that he acted diligently and that such circumstances were excusable.
Disqualification Orders
Article 320 CA empowers the court upon the application of the Attorney General or the Registrar of Companies, to make a disqualification order against ‘any person’ found guilty of a criminal offence under the CA. Therefore, any person who is found guilty in terms of Section 312 (delinquent directors), 315 (fraudulent trading) and 316 (wrongful trading) and consequently ordered by the court to make a contribution to the assets of the company or declared personally liable for the debts of the company, is subject to a disqualification order where it is deemed that such person is unfit to be involved in the management of a company. Suck order may be for a minimum period of one year and a maximum period of fifteen years[22].
Therefore, by virtue of their office, directors are entrusted with the management and control of the company and for such purpose they are given extensive powers over the property and the affairs of the company. They are however also held to high standards both in terms of their duties emanating from the Companies Act as well as by virtue of their fiduciary relationship with the company which requires of them that they act with the utmost good faith. Should they fail in their duties, directors may face serious consequences including personal liability for the debts of the company unlimited or otherwise, as well as criminal proceedings and disqualification from holding the office of director and the risk of such liability increases dramatically where the company is in financial distress.
Liability in Tort
The question to be asked here is whether a director can be held personally liable to the creditors of the company under the laws of tort when such director fails to exercise the care and diligence of a bonus paterfamilias or breaches any law relating to his duties as director. Generally, this is highly unlikely, however one must distinguish the scenario where a director has been involved in fraud or any other crime, where in such case, direct liability can be imposed. It may be argued that a company is unable to commit a tort[23]. In this regard, three theories have been devised in order to determine when a director can be held personally liable in tort for the acts of the company:
“1. That due to the ultra vires rule no company can be held liable for a tort or a crime. Both on basis of logic and in line with statements made in several judgments this would seem to be the case. However, in reality, companies are held liable in tort and convicted of crimes on a daily basis and thus, this theory does not reflect the current state of law. If it were otherwise it would be hard to see how unlawful acts could be imputed to a company.
2. That the ultra vires doctrine applies only to contract and property and hence never applies to criminal or tortuous liability.
3. That a company can be held liable in either crime or tort but only if they are committed throughout intra vires activities. This means that a company may be held liable in torts or crimes in relation to its objects but should not be held liable for any acts which do not fall within its objects”[24].
Criminal Liability
Societas delinquere non potest – It is a universal rule that criminal liability is restricted to natural persons and therefore, such liability cannot be impugned to a corporate body. As affirmed by Edward the First Baron Thurlow: “a corporate entity has no soul to damn and no body to kick”[25]. This phrase brings to the fore the difficulties encountered when managing corporate behaviour and consequently, the effective punishment of misbehaviour.
However, after looking at the Maltese Criminal Code[26], precisely Section 121D, an exception to the criminal responsibility of corporate bodies seems to arise when examining in detail the wording of this legal provision.
“Where the person found guilty of an offence under this title[27] is the director, manager, secretary or other principal officer of a body corporate or is a person having a power of representation of such a body or having an authority to take decisions on behalf of that body or having authority to exercise control within that body and the offence of which that person was found guilty was committed for the benefit, in part or in whole, of that body corporate, the said person shall for the purposes of this title be deemed to be vested with the legal representation of the same body corporate which shall be liable to the payment of a fine (multa) of not less than one thousand and one hundred and sixty-four euro and sixty-nine cents (1,164.69) and not more than one million and one hundred and sixty-four thousand and six hundred and eighty-six euro and seventy cents (1,164,686.70).”
As opposed to a civil action, a criminal action is a public action which is prosecuted by the Executive Police or the Attorney General in the name of the Republic of Malta and not by the person directly or indirectly affected by the commission of the offence[28]. Different offences are found in various parts of the Maltese Legislation. The main offences involving company officers are found mostly in the CA, particularly in relation to acts made prior, during and after the dissolution and winding-up process of a company. It may be argued that the purpose behind the duties and criminal responsibility imposed on directors and other officers is a method devised by the legislator to achieve higher level in the performance and professionalism of the business of the body corporate and also to safeguard the general public from grave wrongdoings[29].
One of the basic duties of a director is precisely to exercise a degree of care, diligence and skill which would generally be exercised by the reasonably prudent man, encompassing “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”[30].
Therefore, if a director mismanages the company in a way that endangers the good governance of the company or fails to adequately supervise and act as the bonus paterfamilias while managing the company’s affairs, he would be personally liable for the damages ensued by the company.
It is not only the criminal code which makes directors liable for their acts or omissions. In this regard, Section 13 of the Interpretation Act[31] states that: “Where any offence under or against any provision contained in any Act… is committed by a body or other association of persons, be it corporate or unincorporated, every person who, at the time of the commission of the offence, was a director, manager, secretary or other similar officer of such body or association, or was purporting to act in any such capacity, shall be guilty of that offence unless he proves that the offence was committed without his knowledge and that he exercised all due diligence to prevent the commission of the offence…”.
By virtue of this provision, the onus of proof is on the individual who possesses the title of a director at the time the commission of the offence. The director has to provide sufficient proof that the offence was committed without his knowing and that he had done every possible matter in his power to avert the happening of that same offence.
Insider Dealing
Insider trading, sometimes also known as “insider dealing”, has been made a criminal offence since there is the use of inside information by a person, usually a director, who may trade in the financial instruments of the company. Such person is at an advantage since it is usually a person who has easy access to sensitive information relating to the company. This offence is established under Section 6 of the Prevention of Financial Markets Abuse Act[32].
“Any person who intentionally engages or attempts to engage in insider dealing, or recommends that another person engage in insider dealing, or induces another person to engage in insider dealing, shall be guilty of a criminal offence.”[33].
Apart from the administrative sanction that the Financial Services Tribunal may impose, there are also the criminal proceedings where if the person is found guilty, the punishment ranges from a fine (multa) to a term of imprisonment that does not exceed seven years. One is to note however that if the competent authority, in this case the Financial Services Tribunal, inflicts a sanction, then the criminal proceedings cannot initiate or continue. However, a civil claim for damages against the wrongdoer is not prejudiced even if a criminal or administrative sanction would have already been imposed.
A director that would have used inside information in dealing in the company’s financial instruments would have breached his duties as director under the CA, would have gone against the offences found in the Prevention of Financial Markets Abuse Act and finally would have also gone against the articles of the Civil Code relating to the non-use of information belonging to another. In this way the director is not only liable in tort for breach of duty but would be also liable for the breach of fiduciary duties under the Civil Code. Due to the difficulty encountered in trying to enforce a civil remedy in relation to insider trading, it seems that the trend is to go for a criminal or an administrative action in order to daunt such wrongdoings. One is to keep in mind, however, that a higher degree of proof is required in criminal or administrative sanctioning[34].
Liability for administrative fines under the CA
Personal liability of the directors may also be brought about by certain acts or omissions of an administrative nature. In this regard, failure by the company to file the various forms required within the time-limits specified in the CA, may lead to the imposition of fines both on the company and the director personally.
“A company shall be jointly and severally liable with its officers for the payment of any administrative penalties imposed under this Act”[35].
These include among others, filings of Form Ts, Form Hs, Form Ks, audited financial statements and annual returns. Other instances[36] of personal liability for administrative fines include the following, however, there are other administrative penalties which arise from other legislation:
- Failure to keep money received from applicants in pursuance of a prospectus for listing in a separate account;
- Failure to give notice of resolution removing a company auditor to the registrar and to the Accountancy Board;
- Failure to inform the Registrar regarding a resolution for the dissolution and voluntary winding up of a company;
- Omission by the company to issue share certificates and failure to a register of members, register of debentures
[1] Companies Act, CAP 386 of the Laws of Malta, hereinafter referred to as CA
[2] Section 136A(1), CAP 386
[3] Farrar and Hannigan, at p. 382
[4] Prof. A. Muscat, Principles of Maltese Company Law, at p. 562
[5] Prof. A. Muscat, Principles of Maltese Company Law, at p. 562
[6] Section 1124A and Section 1124B, CAP 16
[7] Section 136A(2)(a), CAP 386
[8] Section 136A(2)(b), CAP 386
[9] Section 136A(3)(a)(i)
[10] Prof. F. Cremona, Notes on Commercial Partnerships, at p. 113. Vide also Dr. Anthony H. Farrugia noe vs. Vernie Carbone pro et noe, Court of Appeal, 30 May 2001
[11] Section 136A(3)(b)
[12] Section 136A(3)(c)
[13]Section 136A(3)(d)
[14] Section 136A(3)(e)
[15] Section 136A(2), CAP 386
[16] First Hall, Civil Court, 12 November 2013.
[17] Section 147(1), CAP 386
[18] Section 147(2)(a), CAP 386
[19] Section 147(2)(b), CAP 386
[20] Section 148(1), CAP 386
[21] Section 314 CA
[22] Article 320(3) CA
[23] David Jones et noe vs Dr. Giuseppe Mifsud Bonnici noe et, Kumm JDC 29 October 1993
[24] L.C.B Gower, The Principles of Modern Company Law (2nd ed 1957) London, p.
[25] John C. Coffee Jr., No Soul to Damn: No Body to Kick: An Unscandalized Inquiry into the Problem of Corporate Punishment, 79 Mich. L. Rev. 386 (1981).
[26] Criminal Code – Chapter 9 – Laws of Malta
[27] Of Crimes against the Administration of Justice and other Public Administrations
[28] Prof. A. Muscat, Principles of Maltese Company Law, at p. 584
[29] Prof. A. Muscat, Principles of Maltese Company Law, at p. 537
[30] Section 136A(3)(a), CAP 386
[31] Interpretation Act, CAP 249
[32] Prevention of Financial Markets Abuse Act, CAP 476
[33] Section 6(1)(b), CAP 476
[34] A. Muscat (n 162) pg 464, para 3
[35] Section 427(4), CAP 386
[36] This is not an exhaustive list, there are many other instances specified in the CA and in other legislations.
