- A Maltese company is required to have a board of directors that must be compromised of a chairman, executive and non-executive directors. Company directors are nominated by the owners or shareholders of companies in Malta. The chairman will usually lead the board of directors, make sure the board receives all relevant information and act as a communication channel between the company and the shareholders.
- Non-executive directors will not deal with the day-to-day management of the company, but will play a key-role in supervising the executive directors and mainly get involved in resolving conflicts. According to the Maltese laws, however, executive and non-executive directors have the same duties. Non-executive directors should get involved in stimulating the management team in achieving their goals according to the Corporate Governance Code in Malta. Non-executive directors should also be impartial and independent.
- The Companies Act seeks to establish a balancing act between allowing a series of checks and balances on the powers of directors, thereby restricting the possibility of abuse, whilst ensuring that the centralised management function, which rests directly with the directors, are not lost.
- Article 136A of the Companies Act was a relatively recent development and sought to crystallise the directors – role and duties. Similarly, amendments to the Civil Code, set a number of ‘fiduciary obligations’- whereby directors would be regarded as ‘fiduciaries’
Directors are usually appointed by the shareholders of companies in Malta. The of nominating a director in a Maltese company should be transparent and should take place during the general meetings, where the minorities can state their point of view. Directors are required to have a broad experience in the area they are nominated for. They must also have integrity and leadership skills in order to properly conduct the business’ activities.
- Directors should be able to conduct the company in a prudent but effective way, assess and management risks and must be result-oriented in order to achieve all company’s goals.
- Directors will periodically review the management performance and ensure the financial and human resources in order for the company to obtain the desired results and thrive. Maltese directors are also required to attend all general and ad-hoc meetings.
- Responsibilities of directors are even more pronounced in the case of public companies. These companies are obviously far greater and require more public accountability.
- Today, the emphasis on corporate governance is of paramount importance. It encompasses the culture of accountability by directors in public companies towards shareholders that are, ultimately, the owners of such companies. A code of good practice, which establishes standards of behaviour by directors in public companies, will be beneficial in acquiring greater transparency and in reducing corruption.
- Corporate governance needs to take the hold in our local situation in order to ensure more transparency in the management of public companies. It is very important to have the directors’ effectiveness assessed and their actions analysed so as to improve their effectiveness and hence increase shareholder value
The duties of Malta company directors may be categorised in the following manner:
- Those general duties arising out of their juridical position under general principles of law;
- Administrative duties created through the specific provisions found in the Companies Act.
- Duties of loyalty;
- Duties of care and skill.
These duties are laid out in Article 136A of the Companies Act, and have a ‘fiduciary’ character.
The Duty of Loyalty
- Directors should not carry out self-dealings and make a personal profit out of their position as director of a company unless they are otherwise entitled. Directors should not place themselves in a position where there is a conflict between their duties to the company and their own personal interest or the interest of others.
- It is the duty of a director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company to declare the nature of his interest to the other directors either at the meeting of the directors at which the question of entering into the contract is first taken into consideration, or, if the director was not at the date of that meeting interested in the contract or proposed contract, at the next meeting of the directors held after he became so interested.
- A director of a company may not, in competition with the company and without the approval of the same company given at a general meeting, carry on business on his own account or on account of others, nor may he be a partner with unlimited liability in another partnership or a director of a company which is in competition with that company. Breach of this rule will give rise to the possibility of the company to take action against the director who is in such breach or demand payment of any profits made by him in contravention of this rule.
Duties of Care and Skill
Directors are bound to perform their duties with an adequate level of care and skill. Article 136A sub-article (3) further provides that the directors of a company shall:
- be 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; and the knowledge, skill and experience that the director has;.
Directors as Fiduciaries of the Company
Malta company directors are deemed to be fiduciaries of the company. As such, they are bound by the fiduciary duties stipulated in Article 1124A of the Civil Code.
- The duty of loyalty;
- The duty of care, more specifically the duty to exercise the diligence of a bonus paterfamilias in the performance of his obligations,
- A number of the administrative duties, which include:
- The duty to keep any property acquired or held by him in lieu of his position as fiduciary segregated from his personal property;
- The duty to maintain suitable records in writing of the interest of the person to whom such fiduciary obligations are owed;
- The duty to render account in relation to the property subject to such fiduciary obligations,
- The duty to return on demand any property held under fiduciary obligations to the person lawfully entitled thereto or as instructed by him or as otherwise required by applicable law.
The Duty to Promote the Well-Being of the Company
A final general duty imposed upon directors is the obligation to promote the company’s well-being and to ensure its proper administration and management.
All directors, without distinction, owe duties of loyalty towards the company they act for. The Maltese courts have held that it is an established concept that directors’ obligations are to be directed towards the maximum interest of the company itself and not toward the same company’s shareholder.
The key provisions relating to liabilities of directors for breach of duty are laid out in Article 147 and 148 of the CA. Article 147 provides that the personal liability in damages of any director for breach of duty is joint and several, provided that where a particular duty has been entrusted to one or more directors, only such directors shall be liable in damages.
A director shall not be liable for the acts of his co-directors if he proves either –
- that he did not know of the breach of duty before or at the time of its occurrence and that on becoming aware of it after its occurrence he signified forthwith to the co-directors his dissent in writing; or
- that, knowing that the co-directors intended to commit a breach of duty, he took all reasonable steps to prevent it.
Article 148 then provides that any provision, whether contained in the memorandum or articles of a company or in any contract with a company or otherwise for exempting any officer of the company or any person engaged by the company as auditor from, or indemnifying him against, any liability which by virtue of any rule of law would in the absence thereof have been attached to him in respect of negligence, default or breach of duty or otherwise of which he may be guilty in relation to the company shall be void
Other Instances of Personal Liability
- 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.
- In addition, a number of laws impose personal liability on directors in relation to debts that would normally be due by the company. The principal laws in this context are: The Income Tax Management Act, The Social Security Act and The Value Added Tax A
As the culture of appointing non-executive Directors (NEDs) and independent directors to the Boards of Maltese companies increases, regular discussions on how the law regulates their position and role become ever more relevant.
- NEDs are normally described as directors who do not have an active role in the day-to-day management and direction of a company, but would normally make sporadic visits to the company. They are often appointed in large companies typically with the role of scrutinizing managerial decisions in order to enhance the company’s long term success. Thus their independence is crucial, given their typical involvement in such areas as appointment and removal of senior management, remuneration of executive directors and overlooking the general governance of the company.
- The law makes it clear that directors owe a duty of loyalty to the Company, and are responsible for the general governance of the company, its proper administration as well as the management and general supervision of its affairs. Directors are legally bound to use their powers honestly and in good faith, to seek the best interests of the company and to promote its well-being. These duties and responsibilities apply to all directors, irrespective of their designation. Cases dealing with the position of NEDs are not numerous. In Malta, the typical problem involves liability for VAT, given that directors are jointly and severally liable together with the Company for such payments.
- NEDs owe fiduciary duties to the company they serve like all other directors. It is therefore essential that a NED insist on some basic risk management measures, such as laying down clear yardsticks for behavior, when invited to sit on a Board in a non-executive capacity
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