Allan Hans Muhome Legal Consultant April 2016...Directors qualifications and duties Company...

Allan Hans Muhome

Legal Consultant

April 2016+265888304274 - [email protected]

PART TWO

Directors qualifications and duties

Company secretaries

Accounts and Auditors

Liquidation of a Company

Insolvency Act [peep thru only]

2 of 25Allan Hans Muhome Companies Act 2013

Exploring Key Changes April 2016

1.A De Jure Director (a director from law) is is properlyappointed to the board and registered with Registrar ofCompanies - A registered director.

2.A De Facto Director (a director in fact or in reality) - notproperly appointed and registered but who acts as a director.

3. Alternate Director – a person appointed by a director to actwhen he cannot.

4.A Casual Director – fills a casual vacancy that arises betweenannual shareholders’ meetings coz of death/resignation.

5.A Shadow Director – one in accordance with whoseinstructions the Board acts or is accustomed to acting. (not aprofessional advisor)

6.Nominee Director - a shareholder/creditor/employees’ rep.

7.Executive (2 contracts – employee and director) and Non-executive (single contract as director - Independent)

Allan Hans Muhome Companies Act

2013 Exploring Key Changes

April 2016 3 of 25

A private co. must have at least one director. Previously allcompanies were required to have three directors which is nowthe case for Plcs only. One director must be resident in Mw forall companies [S. 162] WHY?. The CA 2013 regulates directors’service contracts for Plcs [S. 216 -219]. Every company mustkeep a register of directors [S. 174].

Ineligible Persons [S. 164]

1) A body corporate, unless for a SOC;

2) A person below the age 18 (previously 21);

3) For Plcs - a person over 70 (or below per constitution);

4) An un-discharged bankrupt;

5) A person prohibited from being a director;

6) A person adjudged to be of unsound mind;

7) A person disqualified by the constitution e.g. where adirector is required to take up shares and fails.



April 2016 4 of 25

APPOINTMENT- (1) First directors are the ones named in theapplication for registration [S. 166(1)]. (2) Subsequent directorsare appointed by an ordinary resolution [S. 166(2)]. (3) The HighCourt has been granted power to appoint a director where thereare no directors or are not quorate [S. 167 ]. (4) The Registrarmay also appoint e.g. following death of a sole director &Shareholder [S.171(9) ]

REMOVAL-A director of a Plc may be removed from office by anordinary resolution at a General Meeting; a director of a Privateco. may be removed from office by special resolution [S. 169].

VACATION – may arise through non-eligibility (e.g. turns 70 fora Plc; adjudged bankrupt or of unsound mind) resignation, deathor other qualification in the constitution.



April 2016 5 of 25

Being a director is easy. Being a responsibledirector is not. Being a responsible directormeans more than just acting with honesty andintegrity and using talents to the company's bestadvantage. It means developing an understandingand awareness of the ever increasing legalobligations and responsibilities being placed ondirectors, breach of which can give rise topersonal liabilities under the civil and criminal lawand even disqualification from holding office as adirector - Charles Russel, Directors Responsibilitieswww.charlesrussel.co.uk

6 of 25Allan Hans Muhome Companies Act 2013

Exploring Key Changes April 2016

1) Duty to Act in Accordance with the Constitution [S. 176] – Minors illplaced Masangano v Masangano (2014). S 39 Co to act intra vires.

2) Duty to use powers for a proper purpose [S. 176] - wrong to issueshares just o alter balance of votes- Bamford v Bamford [1970].

3) Duty to promote the success of the company [S. 177] a number offactors for consideration are provided e.g. the likely consequencesof any decision in the long term; the interests of employees,creditors, suppliers, customers and others; the impact of thecompany's operations on the community and the environment e.t.c.

[Triple bottom – social, environmental and financial] [CSR]

4)Duty to exercise independent judgment [S. 178]

(do not just follow what other directors opinion)



April 2016 7 of 25

5) Duty of care and skill [S. 179] Re City Equitable Fire Insurance[1925] - Director to exercise average skill in accordance withhis experience and skill.

6) Duty not to accept benefits from 3rd parties [S. 181]

7) Duty to avoid conflict of interest [S. 180] Presscane Ltd vPatel - use of mgt accounts by director against his co incourt…

8) Duty to declare interest [S. 182]. A director is obliged todeclare the same to the Board of directors. Such transactionsmay be voided by the company within six months from thedate of the declaration unless the company has received fairvalue under it [S. 186-194].



April 2016 8 of 25

9) Duty against inside dealings [S. 194] [also Securities Act 2010]Diamond v Oreamuno (1969) [USA] -Directors who sold their sharesat a higher value, knowing the next day the shares would loss theirvalue were guilty of insider trading – had to refund difference.

10) Duty as to the company’s solvency (Wrongful Trading) A director ofa company who believes that the company is unable to pay itsdebts as they fall due is obliged to forthwith call a meeting of theBoard to consider whether the Board should appoint a liquidator oran administrator. [S. 222(1)] and disclose the same to the Directorof Insolvency (if Plc)[S. 11 Insolvency Act 2016].

11) Duty to comply with the code of corporate governance The Act hasadopted the ‘‘comply or explain’’ UK approach. It provides that theprescribed code is only directory in nature but the Court, theRegistrar or any authority is entitled to have regard to it.

9 of 25Allan Hans Muhome Companies Act


April 2016

Remedies for breach of directors statutory duties are the sameas those for common law [S.185(1)] they include:-

1. Removal of the director from office;

2. Liability to compensate the co. for any loss;

3. Account to the co. for any profit made;

4. The contract or other transaction may be rescinded by the co.

5. The co. may obtain an injunction against the director’s breach;

6. The director may be ordered to pay a fine or be imprisoned in linewith the provisions of the CA 2013. [General fine K5 m S. 381 – R vLutepo (2015)]

7. Lifting the Corporate Veil – NBM v Nya Ndovie Ker (2007).

8. The Minister, Registrar or the Registrar of Financial Institutions in thecase of Plcs, may appoint inspectors to investigate the affairs of a co.and breaches found may be criminally prosecuted with the consentof the Director of Public Prosecutions [S 331(1)] .



April 2016

Requirement- Under the CA 1984, every company was requiredto have a co. secretary which requirement remains for Plcs only[S. 68, 156] hence register of Co. secretaries remains for Plcsonly [S. 227]. [Financial Institutions also under financial laws].

Qualifications of Secretaries of Plcs [S. 225]

A person who appears to directors to have the requisiteknowledge and experience to discharge the functions ofsecretary of the co; OR has the following qualifications:-

1. that he has held the office of secretary of a public co. for atleast three of the five years immediately preceding hisappointment as secretary; or

2. that he is a member of any professional body of co.secretaries in Malawi (IS THERE ONE?).



April 201611 of 25

The Board is under obligation to cause accounting records tobe kept that, among others, correctly record and explain thetransactions of the co. and enable the financial position ofthe co. to be determined with reasonable accuracy [S. 229].

Financial Statements must be completed, signed by director/sfor all companies [S. 245].

The Board of every co. must, within six months after thebalance sheet date of the co. prepare an annual report andaccounts. [S. 251(2)]. This does not apply to a one personco. [S. 251(4)]. Shareholders of a private co. may also resolveby unanimous resolution against this [S. 251(3)].

IS THIS ANY GOOD FOR INVESTOR CONFIDENCE?



April 201612 of 25

No need for an Internal Auditor (unless a Financial Institutionunder the FSA 2010 – S. 55)

Requirement - The CA 1984 required that every co. have anauditor. In contrast, the CA 2013 makes no such requirement forprivate companies and dormant companies [S 191(1)]. Only plcsto have auditors [& Financial Institutions under financial laws].

[ICAM again argued that audited accounts instill confidence instakeholders such as Banks, creditors, investors, MRA …]

WHAT IS YOUR VIEW?

DO AUDITORS EXORBITANT FEES JUSTIFY THIS?

EASE OF DOING BUSINESS INDEX?



April 2016

Appointment (1) first auditor may be appointed bydirectors (2) Subsequently, appointed at each annualmeeting (3) The Board may fill a casual vacancy (4)the Registrar may appoint an auditor where the co.has not [S. 231].

Special rules for the appointment of a partnership asauditors e.g. one member must be ordinarily residentin Malawi; some partners must be qualified forappointment; no member of the firm is indebted tothe co. or a related co. unless the debt is in theordinary course of business e.t.c. [S. 233]



April 2016

Public Accountants and Auditors Act 2013 [S. 25, 28]Ineligible e.g.

1. An un-discharged bankrupt;

2.A convict of a disgraceful or dishonourable offence;involved in disgraceful or dishonourable conduct;[definition?];

3. Of unsound mind;

4.One removed from a position of trust formisconduct;

5.One convicted of theft, fraud, forgery or perjury;

6.A person disqualified from registration under thelaw.



April 2016

CA 2013 [S. 234(2)] Ineligible e.g.



April 2016

1. A director

WHY –

Conflict of Interest

2. A debtor

3. An employee

4. A liquidator/receiver of the co.

5. A body corporate

6. A related party company

7.A person who is not ordinarily resident inMalawi.

WHY?

Duties – avoid conflict [S. 240], Duty to make a report toshareholders [S. 241] – Accounts to be signed in the name ofthe firm + name of auditor [S. 233(5)]

Contents of Report:-

1. The scope and limitations of the audit;

2. Whether the auditor obtained all info. & explanations;

3.Whether, in the auditor's opinion, the financial statementsgive a true and fair view of the matters covered and wherethey do not, the respects in which they fail to do so;

4.Whether the financial statements have been prepared inaccordance with International Financial Reporting Standards(IFRS) and the CA 2013.

An auditor is required to carry out the audit in accordance withInternational Standards on Auditing.



April 2016

Insolvency Act 2016 [S. 11] - Auditor of a public companyto disclose insolvency or serious financial difficulties of theco. to the Director of Insolvency.

Financial Services Act 2010 –

1. The Registrar may require an external auditor to makea report to him and hold a meeting. [S. 56 & 57]

2. Auditor to inform the Registrar of the insolvency of afinancial institution or contravention of the FSA orother laws, regulation or directives or conditionimposed on its licence. [S. 58]

3. Auditor must verify returns and other reports of afinancial institution which the Registrar may from timeto time require to be verified. [S. 58]



April 2016

Rights –access information [S. 242], receivenotice, attend & speak at shareholders’ meetings[S. 243].

Where the board fails to comply with theserequirements every director is liable to a fine. S.20 of the Public Accountants and Auditors Act -an auditor who certifies accounts where he wasdenied information or does not comply with thelaw commits an offence and may be disciplined.



April 2016

Liabilities – auditors are liable in the tort ofnegligence

Caparo Industries plc v Dickman [1990]

Caparo Plc was a shareholder in a co. It purchasedmore shares in the co. Later brought an actionagainst the auditors of the co. for negligentoverstatement of the pre-tax profit of the co.

IS THE CLAIM SUSTAINABLE IN COURT?



April 2016

House of Lords held that the work done by theauditors was for the benefit of the co, that is, not forthe benefit of individual shareholders but for thebenefit of the shareholders collectively. Therefore, noduty of care was owed by the auditors to outsideinvestors who may see the accounts before buyingshares. Nor, for example, was a duty of care owed bythe auditors to a bank which was considering lendingmoney to a company on the basis of the auditedaccounts. Further, the auditors did not owe a duty toexisting individual shareholders. But a ‘specialrelationship’ may exist between the auditor and athird party.



April 2016

Replacement of an Auditor - security of tenure [s 238(1)] a co.shall not remove or appoint a new auditor unless given 28 days'written notice and the auditor given opportunity to makerepresentations (oral/written) to the shareholders [Co to pay forthe same]. In respect to an auditor of a financial institution, hisremoval before expiry of his term only becomes effective onapproval from the Registrar of Financial Institutions [s. 60 FSA].

Resignation - Where an auditor gives the board written noticethat he does not wish to be reappointed, the board must, ifrequested to do so by that auditor, distribute to all shareholdersand to the Registrar, at the expense of the co., a writtenstatement of the reasons.

An auditor may resign prior to the annual meeting by givingnotice.



April 2016

The CA 1984 provided comprehensively for winding up ofcompanies under Part XII and the Winding Up Rules.

The CA 2013 has departed from that scheme.

The law on winding up of companies will now begoverned by the Insolvency Act, 2016 which will apply toall companies incorporated or registered under the CA2013 [S. 329,330].

The Insolvency Act has however maintained the modes ofwinding up namely; (1) Compulsory (Court order) (2)Members Voluntary (Declaration of Solvency) and CreditorsVoluntary (No declaration of solvency)



April 2016 23 of 25

A robust insolvency system ensures the survival of economicallyefficient companies and reallocation of resources of inefficientones. Fast and cheap insolvency proceedings result in thespeedy return of businesses to normal operation and increasesreturns to creditors. The Act introduces the following, inter alia:-

1. Office of Director of Insolvency [PS Min of Industry and Trade]

2. Insolvency Practitioners (Rules)

3. Company Re-organisation (Administration)

4. Receivership

5. Winding up of Companies

6. Bankruptcies of individuals (repeals the Bankruptcy Act 1928)

7. Individual Voluntary Arrangements

8. Cross-border insolvency – application of UN Com. On Int.Trade Law (UNCITRAL)Rules. [has 355 sections]



April 2016 24 of 25

THANK YOU FOR YOUR ATTENTION

Allan Hans Muhome



April 2016

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