07-12-2012

Fiduciary Duties Of Directors Of Limited Companies Incorporated In Cyprus Under The Companies Law, cap. 113

Authors

  • Christiana Vassiliou, Iakovos Panagi, Advocates
    Associates at Antis Triantafyllides & Sons LLC

Who is a fiduciary?

A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty and faithfulness.

What is meant by a director’s fiduciary duty?

A fiduciary duty of a director is a duty which is derived from the principle that a director must be loyal to his company. Fiduciary duties apply to directors not only as regards the decisions they take in the boardroom, but also whenever a director is acting as an officer of the company or in relation to the company’s assets or affairs. Any breach of any fiduciary duty will attract an equitable remedy. Equitable remedies are primarily restitutionary or restorative rather than compensatory.

What are the remedies for breach of a director’s fiduciary duties?

Equitable remedies can be awarded for breach of a fiduciary duty. Equitable remedies seek to restore the claimant’s property and to ensure that any unauthorised profits are returned. Equitable remedies include (but are not confined to) the restoration of property, a requirement to account for profits, rescission (where for example a contract has been entered into in which a fiduciary has an undeclared interest) and injunction.

What are the sources of a director’s fiduciary duties?

The fiduciary duties of directors have been developed by court decisions over time and these decisions form part of the common law. A fiduciary duty can also be found in statute

i.e. the duty of directors who are interested in contracts to declare the nature of their interest, has been codified and is included in the Cyprus Companies Law.

By whom and to whom are the fiduciary duties owed?

Fiduciary duties are owed by each director individually and they apply from the date on which the director’s appointment comes into force. Even after the removal or resignation of a director, said director may remain liable for breach of a fiduciary duty which occurred at the time he held the office of director. Fiduciary duties are owed to the company and to the members (present and future) of the company as a whole and not individually.

What duties does the requirement of loyalty include?

The duty of loyalty includes, inter alia, the duty to act in the best interests of the company, the duty to act within powers, the duty to exercise powers only for the purposes for which they are conferred, the duty not to place himself in a position in which there is a conflict between his duties and his personal interests, the duty not to make secret profits, the duty to respect the company’s property and the duty to give sufficient information.

What is meant by acting in the best interests of the company?

Directors must act in good faith in what they consider (not what the court considers) is the best interests of the company. The phrase “interests of the company”means the interests of the present and future members of the company as a whole, based on it being continued as a going concern and balancing a long-term view against short-term interests of present members. When attempting to determine whether a director has acted in breach of his duty to act in the best interests of the company, the actual subjective motivation of the director in question needs to be investigated. A failure to direct one’s mind to the interests of the company may, for example, be sufficient to constitute a breach of this duty. It has been held that it is not necessary to show conscious dishonesty. Similarly, if directors have put their own interests or those of some third party (even if this party is a subsidiary of the company) before those of the company there may be a breach of the duty. A corollary to this duty is the duty that a director may not fetter his discretion to act in the best interests of the company whether by substituting someone else’s judgement for his own or entering into an agreement to act in a particular way in the future.

What is meant by acting within powers?

Directors are required to act within the powers conferred on them in accordance with the provisions of the company’s memorandum and articles of association. Their liability in respect of any breach does not require any element of fraudulent intent.

Can a company try to prevent a director from acting outside his powers by inserting restrictions in the memorandum and articles of association?

In accordance with section 33A of the Companies Law, any director of a company is deemed, as regards third parties, to be able to bind the company notwithstanding any limitation to his authority in the memorandum and articles of association of the company. This deemed authority is not applicable in situations where the specific action of the director is beyond his capacity as provided by law. However, a director who acts outside the scope of his powers as stated in the memorandum and articles of association may be liable to the company for breach of his duty to act within his powers.

What is meant by exercising powers only for the purposes for which they are conferred?

A director must exercise his powers for the particular purpose for which they are conferred and not for improper or collateral purposes even if he acts in what he honestly believes are the best interests of the company. The test as to whether a purpose is proper is an objective test, meaning that if a court concludes that a power was exercised for an improper purpose, a director will be in breach of the duty notwithstanding the fact that he genuinely (even reasonably) believed that he was exercising the power for a proper purpose. A court is unlikely to interfere with the exercise by the directors of discretionary powers unless it is proved that they have acted arbitrarily and capriciously or as noted earlier, for an improper purpose. As an example, but not limited to, a court would be inclined to conclude that a power has been exercised for an improper purpose if it has been exercised in such a way as to upset the constitutional balance between the shareholders and the directors. This means that a director will be at risk of breaching the duty if he takes a decision which, either according to general principles, or in the context of the particular internal arrangements of his company, should have been taken by the shareholders.

What is meant by a director not placing himself in a position of conflict?

A director must not put himself in a position which could give rise to an actual or potential conflict between a personal interest and his duty of loyalty to the company. For example, if a director were to agree through a third party to sell to the company an interest in a property, whilst all the time concealing his interest, he would be in breach of his fiduciary duty.

Can a situation of a conflict of interest be allowed to exist?

The fiduciary duty not to allow a conflict of interest to arise is not breached if the directors act in accordance with section 191 of the Companies Law which imposes a duty on directors who are in any way, directly or indirectly, interested in a contract or proposed contract with the company to declare the nature of their interest at a director’s meeting. The duty is continuous and if at any later stage any director becomes interested in any existing contract with the company, then he has an obligation to declare his interest at a directors’ meeting immediately following the date on which he became interested. In addition to the foregoing, the articles of association of a company can provide that a director shall not be prohibited from contracting with the company merely because of his tenure and that any such contract shall not be liable to be voided. In such a situation, any director so contracting or being so interested shall not be liable to account to the company for any profit realized by any such contract by reason of the director holding that office or generally of the fiduciary relationship. Alternatively, the articles of association may require the nature of the director’s interest to be declared by the director at a directors’ meeting at which the question of entering into the contract or arrangement is initially considered and may restrict the ability of the director to vote at any directors’ meetings in relation to the contract or arrangement in which he has a material interest. In some instances, the articles may require that the proposed transaction is approved by the shareholders in general meeting. The same may apply in cases where the director becomes interested in a contract or arrangement at a later stage. Then, in that case the director has a duty to declare it at the first opportunity after the director assumes that interest.

Why does a director have a duty not to make secret profits?

A director is in a position of trust and confidence and therefore he is not allowed to take a personal profit from any opportunities that stem from the directorship, even if the director is acting honestly and for the good of the company. Any profit accruing to the director in such a case must be returned to the company. By way of example, a director must refund any profit received for a contract that has arisen as a result of his position as a director regardless of whether the company itself benefited from the opportunity. A director should not use either the company’s property or any confidential information which comes to him in his capacity as director of the company for his personal interests or personal gain.

Why should directors respect the company’s property?

Directors, because of the nature of their relationship with the company, should act as trustees of its money and property which is in their hands or under their control. Their powers must be exercised in good faith in the company’s interests, and the company’s property (e.g. money in a bank) must not be misapplied for purposes other than for the company’s benefit.

Do directors have an obligation to provide information to the shareholders?

Directors owe a duty to provide the shareholders with sufficient information in order to enable them to be in a position to reach informed decisions with respect to any proposals to be put to them at a general meeting of the company.

What level of care and skill should one expect from a director?

A director of a company must exercise reasonable care, skill and diligence. This means the care, skill and diligence that would be exercised by a reasonably diligent person with:

  • the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and
  • the general knowledge, skill and experience that the director has.

Implicit within this duty is that directors, collectively and individually, have a continuing obligation to acquire a sufficient understanding of the company’s affairs so that they may properly discharge their duties.

Is the requirement to exercise reasonable care, skill and diligence a fiduciary duty?

The duty to exercise reasonable care, skill and diligence is not a fiduciary duty but it is a very important duty owed by directors.

What is a non-executive director?

Non-executive directors are directors who are not involved in the day to day business of the company. They are appointed to company boards because of their independence of judgement and in order to supervise the executive directors and management.

Do executive and non-executive directors have the same duties?

The Companies Law does not distinguish between directors and non-executive directors. The foregoing notwithstanding, it should be noted that if a non-executive director has professional experience and qualifications (by virtue of being, for example, a banker, lawyer or accountant), he will be expected to exhibit the discipline, caution and attributes of his profession in dealing with the company’s business. A non-executive without such qualifications, but with special skill or expertise, will be judged on the basis of his own abilities. The non-executive directors of a company are entitled to assume that, for example, if the auditors are satisfied with the company’s accounts then the accounting matters have been handled properly.

Can directors delegate their duties?

The directors can delegate their duties provided the articles of association expressly authorize them to do so. Directors cannot absolve themselves entirely of their responsibility by delegation to others, even in the absence of grounds for suspicion to trust the integrity and/or the competence of any to whom the duties of the directors are delegated. In this respect, they must supervise the discharge of the duties so delegated. A delegation not carried out in accordance with the requirements of the articles of association may be void.

What is meant by an alternative director?

If the articles of association of the company allow, a director may appoint any other person to act as an alternate director of the company. The alternate director has the same duties as the director who appointed him. If the director who has appointed the alternate director ceases to be a director, for whatever reason, the alternate director shall thereupon cease to have any power or authority to act as an alternate director.

Can directors be indemnified?

The directors can be indemnified only in accordance with section 197 of the Companies Law. Section 197, when read with respect to directors, provides that any provision whether contained in the articles of association of a company or in a contract with a company or otherwise, which exempts a director from, or which indemnifies any director against, any liability which by virtue of any rule of law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust, of which a director may be guilty in relation to the company, shall be void.

Are there any exceptions to the general rule of Section 197?

Section 197 provides that nothing in the section itself, shall operate to deprive any director of a right to be indemnified:

  • in respect of something done or omitted to be done by a director, while any such provision was in force; and
  • where a company wishes to indemnify a director against any liability incurred by him, in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in which he is acquitted.
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