Directors’ duties under the Companies Act, No. 17 of 2015 are set out in sections 140 to 151. Section 140(3) provides that the general duties are based on common law rules and equitable principles and have effect in place of those rules and principles with respect to the duties owed to a company by a director. Getting the actual section numbers right matters for anyone citing them in a board resolution, a demand letter or a derivative claim, since the numbering is easy to misremember by one or two.
Directors’ Duties: Scope and the Core General Duties
Under section 140(1), the general duties are owed by a director to the company, not to individual shareholders. A person who ceases to be a director remains subject to the duty in section 146 with respect to property, information or opportunities of which they became aware while a director, and to the duty in section 147 for things done or omitted before ceasing (section 140(2)).
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. Issuing shares to dilute an unwanted shareholder, even if commercially beneficial, is a classic example of exercising a power for an improper purpose.
Section 143 requires a director to 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, having regard to matters including the long-term consequences of decisions, the interests of employees, and the need to foster business relationships with suppliers and customers.
Section 144 requires a director to exercise independent judgement. This matters for directors appointed to represent controlling shareholders or co-investors under a shareholders’ agreement.
Section 145 imposes a duty of care, skill and diligence. The standard is both objective, that of a reasonably diligent person with the general knowledge, skill and experience reasonably expected of a person carrying out the director’s functions, and subjective, the actual knowledge, skill and experience of the director. A professionally qualified director is therefore held to a higher standard in their area of expertise.
Section 146 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 property, confidential information or the director’s position. A conflict is not an infringement if it is authorised by the directors in the manner the section allows, and section 146 sets quorum and voting conditions: the authorisation is effective only if the conflicted director is not counted in the quorum and does not vote. Obtain authorisation before the conflicted conduct, not once a dispute has arisen.
Section 147 prohibits 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.
Declaring Interests in Transactions: Section 151
Separately from the six general duties, section 151 requires a director who is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, or one already entered into, to declare the nature and extent of that interest to the other directors. In a public company the declaration must also be made to the members within seventy-two hours, and where the transaction is valued at ten percent or more of the company’s assets, section 151(2) requires further disclosure to members. This is a transaction-specific disclosure duty distinct from the avoid-conflicts duty in section 146, so a director who has avoided an actual conflict can still breach section 151 by failing to disclose an interest.
Who These Duties Apply To
The duties are not limited to persons formally appointed. Section 2 defines “director” to include any person occupying the position of a director by whatever name called, and any person in accordance with whose directions or instructions, other than advice given in a professional capacity, the directors are accustomed to act. A shareholder, consultant or parent-company representative who routinely directs a subsidiary’s board therefore does not escape these obligations by avoiding the title. This matters most in group structures and investor-controlled companies, where the person calling the shots may not be the person named on the CR12.
Consequences of Breach
Section 148(1) provides that the consequences of breach, or threatened breach, of the general duties are the same as would apply if the corresponding common law rule or equitable principle applied. Under section 148(2), all of the duties except 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. In practice, remedies can include damages, injunctive relief and an account of profits, and the company may in appropriate cases ratify a breach by resolution of the members, subject to limits where the ratifying members are themselves implicated. Part XI of the Act (sections 238 to 242) provides for derivative claims, under which a member can seek the court’s permission to bring a claim on the company’s behalf where the company itself, often controlled by the directors in breach, does not pursue it.
Duties as Insolvency Approaches
As a company nears insolvency, the practical focus of the section 143 duty shifts toward the interests of creditors, since the members’ residual interest is of diminishing value. Directors who keep trading, incur fresh credit or pay connected parties once the company’s position has clearly deteriorated risk personal liability claims by a liquidator or administrator under the Insolvency Act, 2015, separately from any Companies Act claim. A board unsure whether the company has crossed that line should treat the uncertainty as a reason to take formal insolvency advice promptly.
Practical Compliance Steps
Ensure board meetings are properly convened and minuted; record declarations of interest under section 151 and keep them updated as circumstances change; route related party transactions through the correct authorisation before they proceed; and make decisions on adequate information rather than rubber-stamping. A director who disagrees with a decision should have the dissent recorded in the minutes, since silence can be read as acquiescence.
How We Can Help
Clay & Associates Advocates advises boards and directors on their duties, conflict authorisation, interest declarations, shareholder disputes and corporate governance. See also our guides to company formation in Kenya and commercial contracts in Kenya. Speak to our corporate and commercial practice or contact us for advice.
Sources: Companies Act, 2015, sections 2, 140 to 148, 151 and 238 to 242; Insolvency Act, 2015.
Frequently asked questions
Who are directors’ duties owed to?
To the company (section 140(1)), not to individual shareholders, although members can enforce them through a derivative claim.
Which sections set out the general duties of directors?
Sections 142 to 147 of the Companies Act, 2015, with the duty to declare interests in transactions in section 151.
Can someone who is not formally a director be bound by these duties?
Yes. Section 2 includes in the definition of director any person in accordance with whose directions or instructions the directors are accustomed to act, other than professional advice.
Is the duty of care enforced like the other duties?
No. Section 148(2) excludes the section 145 duty from enforcement in the same way as other fiduciary duties.
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This article is general information on Kenyan law as at its publication date, not legal advice. Reading it does not create an advocate and client relationship.
