by Andria PapageorgiouDirectors’ duties under Cyprus Law
A. INTRODUCTION
The board of directors of a Cyprus company is the administrative body responsible for the day-to-day management of the company.
According to section 170 of the Cyprus Companies Law, Cap. 113, it is mandatory for a private company limited by shares to have at least one director on the board of directors while public companies must have at least two directors. In the case of private companies with a single member, the sole director may also be the secretary of the company (section 171 (1) of the Cyprus Companies Law, Cap. 113).
The provisions of the Cyprus Companies Law, Cap. 113 do not explicitly fix the maximum number of directors to be appointed on the board of directors of a Cyprus company, however, this restriction is imposed in the articles of association of each Cyprus company.
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.
B. WHO MAY BE APPOINTED AS A DIRECTOR?
Any natural person or legal entity qualifies to be appointed as director of a Cyprus company.
The Cyprus Companies Law, Cap. 113 does not make explicit provisions of any formal requirements for the appointment of a person or legal entity in the position of director.
Furthermore, the director of a Cyprus company need not be a shareholder of the company.
C. APPOINTMENT AND REMOVAL OF DIRECTORS
The first directors of a Cyprus company are appointed by the subscribers of the company and from there on, the procedure to be followed for the appointment and/or removal of subsequent directors is governed by the company’s articles of association.
Subject to the articles of association of the company, the appointment of a director will arise in instances such as to fill a casual vacancy, i.e. when a director has retired or when it is necessary to appoint an additional director.
The company may by ordinary resolution remove a director from office, prior to the expiration of his period of office, by adopting an ordinary resolution in general meeting, notwithstanding, anything contained in the articles of association of the company or any agreement between the director and the company.
D. GENERAL DUTIES
1. Fiduciary Duties
A director owes a duty to the company to act bona fide, meaning in good faith in the best interests of the company. This duty is commonly called the “fiduciary duty” of directors. The core of this duty is that the directors must act to promote the success of the company, taking into consideration both the short-term and long-term interests of the shareholders. In order to adequately execute this duty, directors must be loyal. In other words, they must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members. This gives directors considerable leeway, but if they establish their honest belief to that effect, then necessarily there must be some evidence that they actually considered the matter.
In considering whether a director did act bona fide in the interests of the company, the question can be asked in terms of whether an intelligent and honest director could in the whole of the circumstances reasonably believe the transaction to be for the benefit of the company. In order for a director to decide whether or not an act is promoting the success of the company, he examines the objectives of the company as set by the members of the company.
It is of utmost importance that directors must while exercising their fiduciary duties act in accordance with the company’s constitution (such as the articles of association) and exercise their powers only for the purposes allowed by law. The payment of a dividend when there are insufficient profits to permit distribution is an illustration of a breach of this duty.
1.1 Independent judgment
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.
1.2 Loyalty and conflicts of interests: Duty to avoid a conflict of interest is one of the directors’ fiduciary duties
It is a long-established equitable rule precluding a fiduciary/director from entering without consent into engagements in which he has or can have a personal interest conflicting or which may conflict with the interests of those whom he is bound to protect
The no-conflict rule refers to the exploitation of property, information or opportunity of which a director became aware at a time when he was a director of a company. This duty applies whether the conflict is between ‘interest’ and ‘duty’ ie between the direct or indirect interests of a director and the interests of the company and his duty to advance those interests and/or where there is a conflict or possible conflict between ‘duties’ (for example where a director is a director of two or more companies and has a separate duty to advance the interests of each company).
Not only directors must not place themselves in a position of a conflict or possible conflict, but also in case they find themselves in such a position, they must regulate or abandon the conflict.
1.3 Disclosure
Directors have the duty to disclose any, direct or indirect, interest in a General Meeting. However, they do not have to account for interest if they are allowed to have that interest by the Company’s Constitution, or the interest has been disclosed to the Board and approved by the Company in a General Meeting.
Apart from these, a Director in order to be is a good fiduciary, must act fairly as between the Members of the Company.
1.4 Duty to exercise skill and care
In addition to their fiduciary obligations, directors should be subject to duties of care and skill appropriate to the modern commercial world, bearing in mind the increased emphasis on higher standards of corporate governance. In general, the breach of the duty gives rise to liability for negligence; however, it is important to note that directors are rarely sued for negligence in the management of a company’s affairs.
Enforcement of the duty of care and skill takes place when the company goes into insolvent liquidation or administration where a liquidator or administrator may consider it worthwhile to pursue a director for wrongful action or decision. If in the course of a winding-up of a company, it seems that directors knew or ought to know that the company has no reasonable possibility of paying and nevertheless, they did nothing to cease the company from being credited, then they may become personally liable for that credit as per section 307(v) and 312 of the Companies Law. In this case, directors can avoid the liability if they show that they have taken “every step with a view to minimizing the potential loss to the companies’ creditors as they ought to have taken“.
1.5 Standard of care, skill, and diligence
All directors of the company are collectively responsible for the company’s affairs, but equally directors’ duties are ‘personal and inescapable’ duties, and so within that collective responsibility each director must meet the appropriate standard of care, skill, and diligence. The standard of care, skill, and diligence that is required is that of a reasonably diligent person who has taken on the office of director, set in the context of the functions undertaken, with that objective minimum standard capable of being raised in the light of the particular attributes of the director in question. For example, if a director is a professional person, such as a chartered accountant, is required to meet the standard expected from a reasonably diligent director carrying out the functions carried out by him in that company and having that personal attribute. This interpretation of the duty of care is set out in Re D’ Jan of London Limited [1993] B.C.C. 646. It is commonly known as the “objective” or “benchmark” test of what “the reasonable man” would expect of a director in particular circumstances. If a director has a specific skill or level of expertise, then he or she must exercise that skill in addition to the “benchmark” test.
2. Statutory Duties
The statutory duties of directors are enforced by the Companies Law, Cap. 113, Income Tax Laws, VAT, Customs & Excise legislation, Health and Safety and Environmental legislation.
As far as Companies Law is concerned, directors have various duties to the company, its shareholders, and the public. To start with, directors must be registered as per s.192. The number of shares or debentures which are held by them must also be stated in the register (s. 187). In case of transfer of shares in a company, directors must take all reasonable steps to secure those particulars with respect to the payment made to him as compensation for loss of office, including the amount thereof, are disclosed (s. 185). In addition to this, directors have the duty to disclose any direct or indirect interests, if any, which arise under a contract or a proposed contract with the company (s.191). Directors’ salaries, pensions, compensations, and/or loans offered to them by the company must be transparent and hence, included in any accounts of a company laid before it in general meeting (s. 188 and s. 189). Directors must make a statement in lieu of prospectus to be delivered to the registrar of companies upon company ceasing to be a private company (s. 31), make contracts following the formalities of s. 33 and sign documents that require authentication as per the provisions of s. 37. Regarding the publication of the prospectus, directors are obliged to draft the same according to the formalities of ss. 38 and 39. Moreover, directors must execute the transfer of shares taking into consideration pre-emptive rights and the procedural formalities stated in s.71 to s.82, such as the issuance of both the certificates of shares and the certificates of all debenture stock allotted or transferred within two months after the allotment.
Further to these duties, directors must keep books of account available for inspection (s.141) and make a complete set of financial statements in accordance with the International Accounting Standards (s.142). They must attach to the financial statements a report in relation to the status and the foreseeable development of the company affairs, as well (s. 151). Any alteration or initial drafting of books of account, papers, and securities must be made with due consideration since in winding up, any mistakes in these documents may give rise to personal liability under s. 308. Last but not least, in case of directors make a petition to the Court for winding up, they must comply with the procedures of s.213 and contribute the assets of the company in accordance with s.207.
3. Transparency in financial reporting
It is worth mentioning that directors must keep books of account and financial statements open for inspection at least for a period of six years and in a place within the Republic of Cyprus. If a director does not comply with this duty, then he or she is liable for committing a criminal offense, the penalties of which range from a default fine to 2 years imprisonment. Moreover, he or she will have to compensate the company with an amount equal to the loss that occurred by his or her breach of duty.
E. TO WHO 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, the 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).
F. 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:
- The injunction to block them for violating their duties;
- Declarations and orders for setting aside the decisions taken;
- Damages;
- Restoration of the Company’s property;
- Cancellation of the relevant contracts; and
- Account of profits.
- Summary dismissal of a director.
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Disclaimer: The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any matter. Andria Papageorgiou Law Firm is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information.