What Are My Legal Duties as a Director of a Kenyan Company?

The duties of a director of a Kenyan company are set out in sections 142 to 147 of the Companies Act, 2015, and they apply from the day of appointment whether or not anyone explains them. They are owed to the company, they apply equally to a sole director and to a director of a large company, and breach has civil consequences. Section 140 confirms that the general duties are based on common law rules and equitable principles, and that a former director remains subject to some of them. This guide sets out what each of the duties of a director requires in practice.

Act within your powers and promote the company’s success

Section 142 requires a director to act in accordance with the company’s constitution and to exercise powers only for the purposes for which they are conferred. Using a power given for one purpose to achieve an unrelated goal is the typical breach.

Section 143 is the broadest of the duties of a director. A director must act in the way the director considers, in good faith, would promote the success of the company for the benefit of its members as a whole, and in doing so must have regard to the following:

• the long-term consequences of any decision of the directors;
• the interests of the company’s employees;
• the need to foster business relationships with suppliers, customers and others;
• the impact of the company’s operations on the community and the environment;
• the desirability of maintaining a reputation for high standards of business conduct; and
• the need to act fairly as between the directors and the members.

Section 143(3) makes the duty subject to any law requiring directors, in certain circumstances, to consider or act in the interests of creditors. The section does not itself say when that happens, so when a company is in financial difficulty, directors should take advice on the insolvency rules. Our article on when directors can be personally liable on insolvency covers that ground.

Independent judgment, care, skill and diligence

Under section 144 a director must exercise independent judgment. The duty is not infringed by acting in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or in a way authorised by the company’s constitution. A director cannot, however, simply follow instructions from whoever appointed them. A nominee director still owes these duties to the company.

Section 145 sets the standard for care, skill and diligence. A director must exercise the care 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 director’s functions, and with the actual knowledge, skill and experience the director has. The standard is therefore objective and subjective at once. A director with financial training is held to a higher standard on financial decisions than a colleague without it.

Conflicts of interest and third-party benefits

Section 146(1) requires a director to avoid a situation in which the director has, or can have, a direct or indirect interest that conflicts, or may conflict, with the interests of the company. It applies in particular to the exploitation of company property, confidential information, the director’s position, or opportunities in or for the company, and it does not matter whether the company could itself have used the property or opportunity. The duty is not infringed if the matter has been authorised by the other directors (section 146(3)(b)), and for a private company that authorisation may be given by the matter being proposed to and authorised by the directors, so long as nothing in the constitution invalidates it. Section 151 separately requires a director interested in a proposed or existing transaction with the company to declare the nature and extent of the interest to the other directors, and to the members within seventy-two hours in the case of a public company.

Section 147 prevents a director from accepting a benefit from a third party attributable to the fact that the person is a director, or to any act or omission as a director. Benefits from a person by whom the director’s services are provided to the company are not treated as third-party benefits. A person who leaves the board remains subject to the section 146 duty on opportunities they learned of as a director, and to the section 147 duty for things done before they left (section 140(2)).

What happens if the duties of a director are breached

Section 148(1) provides that the consequences of breach are the same as would apply if the corresponding common law rule or equitable principle applied. Under section 148(2), the duties, with the exception of the care, skill and diligence duty in section 145, are enforceable in the same way as any other fiduciary duty owed to a company by its directors.

Disqualification is a further consequence. Under section 215, on convicting a person of an offence relating to the promotion, formation, management, liquidation or administration of a company, the court may make a disqualification order. The maximum period is five years if the order is made by a magistrate’s court and fifteen years in any other case. Separate disqualification provisions apply to fraud or breach of duty while a company is in liquidation or under administration (section 216).

The duties of a director are the legal basis on which a director’s decisions can be challenged, personally, long after the decision was made. Written records help: section 210 requires minutes of directors’ meetings to be recorded and kept for seven years. For the minimum board rules, see our guide on how many directors a Kenyan company needs, and for family companies our article on formalising a family business board.