Duties and Liabilities of Directors under Maltese Law

Talk to Us

Introduction to Directorship Under Maltese Law

Before going into the specifics of Maltese law, let’s dive briefly into the general activities of a director within a company. Effectively, a company is managed and controlled by its shareholders and board of directors. It is the Shareholders who generally choose who gets appointed to sit on the board of Directors. Consequently, directors are duty-bound to respond to the shareholder while ensuring that they carry forward the commercial interest of the business whilst satisfying its legal obligations; but their duty list does not end here. 

Directors also exercise executive functions in the everyday decision-making process of the company. Whilst it is true that most sub-tasks and decisions are generally left in the hands of other senior officers and managers reporting to the board; It is non the less ultimately the responsibility of the directors to oversee the overall running of the Company. Therefore although managers are in direct contact with the rest of the employees, they have to report, consult and seek approval from directors when the implications are significant. In this way, directors are not only kept abreast of the goings-on of the company, but they are directly involved in decisions taken to move the company forward, ensure proper business strategy is adhered to in line with its business plan and key milestones, keep the company profitable or at least solvent and most of all adhering to its legal and statutory filing obligations.

Hence, directors are duty-bound not only to the shareholders, but also to ‘the company’, which would include the employees, the growth and functioning of the company as a whole, and whatever company values and/or goals are set out by the company’s Memorandum of Association (MoA). Yes, the aim is to make a profit; but how can profits be made if employees are disgruntled and not giving their 100%? Is the company keeping up with the competition? Are losses being made due to inefficiency? If losses are made due to legacy technology, is there not the need for new software and/or processes? Some of these decisions can be costly; but are they worth it in the long run? If so, are the shareholders ready to acquiesce profits in the short run for a larger market share?

This is the tightrope that directors walk on, and that is what is meant by “duty-bound to the company”.

 

Ergo, from the point of view of a company, the shareholders own it, while the Employees and its directors drive it forward. The director faces decisions taken from the top and challenges from the bottom that need to be resolved, and any decision taken should be for the benefit of first and foremost of the company and secondly its employees and shareholders.

Talk to Us

Maltese Law: Article 136A of the Companies Act & the Civil Code

Article 136A of the Companies Act determines the general duties of directors. In essence, one can draw out two categories from the Act: fiduciary duties and statutory duties. The Civil Code provides further legal instructions on the fiduciary duties of directors.

Fiduciary Duties of Company Directors

Fiduciary duties comprise directors’ legal obligations to act in the best interests of the company and its shareholders; acting in good faith, with care, skill, and diligence, separating one’s own profits and interests from that of the company, and only using the confidential company information for the benefit of the company. Under the Civil Code the director is considered to be acting as an agent for the company, together with the role’s mandatory, fiduciary obligations towards it. This measure ensured that these became part of the obligations of the director, albeit this practice had been applied by the Courts prior to the legislation being enacted. Many of the fiduciary obligations can be linked with the duties of directors under the Companies Act; such as the duty of loyalty and that of acting in the best interest of the company, the duty of impartiality, the duty of care, and the duty of confidentiality.

Statutory Duties of Company Directors

The statutory duties comprise the legal requirements that directors must comply with under the Act or other relevant legislation. Thus, every director is bound to exercise their powers within the limits of the law and what is permitted to them according to the MoA of the company.

Talk to Us

Maltese Law: Chapter 386 of the Laws of Malta, Companies Act – Executive vs Non-Executive Directors

In practicality, shareholders appoint both executive and non-executive directors to the company’s board. Executive directors are generally given powers by the board or directly by the company’s articles. This position requires them to be entirely dedicated to the company’s management. A good example is the Managing Director, whom the board appoints to deal with the company’s most crucial daily affairs.

Contrastingly, in a general sense non-executive directors are independent members of a company’s board, devoid an executive office. They act as advisors and provide oversight, guidance, and advice to the executive team, especially when it comes to policy-making and planning. The role of non-executive directors is an important function to have in licensed entities as this may satisfy the four eye principle requirements.

With this in mind, one would expect the duties and liabilities of Executive and non-executive directors to differ from one another. The weight and the involvement required are not the same. Surprisingly enough though, the Maltese Companies Act’s description of a ‘director’ is as follows: 

Director:
‘Any person occupying the position of director of a company by whatever name he may be called carrying out substantially the same functions in relation to the direction of the company as those carried out by a director’.

 

This means that despite the fact that various designations of company directors exist, not only does the law not distinguish between executive and non-executive directors, but it identifies as ‘director’ anyone who occupies the role de facto; even if the person is devoid of the designation and/or occupies it informally. Consequently, one could argue that the responsibilities and liabilities of both executive and non-executive directors are one and the same.

On the other hand, Article 1124A defines directors as fiduciaries of the company. This provision holds that the personal liability of the directors in damages for any breach of duty shall be joint and several unless particular duties are entrusted to one or more directors, in which case only those can be held liable to damages. In view of this, shareholders may want to assign particular duties beforehand contractually to each individual director (or list specific duties listed formally within the company’s statute), to avoid potential future mishaps about liability.

Talk to Us

Maltese Case Law

As one can expect, case law at times provides confirmation of legal interpretation of the law, but also ambiguity in other instances. Below are cases related to the fiduciary and statutory duties of directors, as well as different rulings on the liability of directors occupying different (executive/non-executive) roles.

The Sant Fournier Charles vs Attard Montalto case confirmed that directors owe their duties to the company, failure of which may lead to actions being taken against directors in their personal name, with the Court expressing that:  “It is an established concept that directors’ obligations are to be directed toward the maximum interest of the company itself and not toward the same company’s shareholders”. Albeit, the court did not address the contention regarding executive vs non-executive directors. This did, however, uphold directors’ statutory duties as stipulated by the law.

In the 2014 case of Anthony Caruana & Sons Limited vs Caruana Cristopher, the Court of Appeal rejected the first court’s interpretation of the director’s duties with regards to fiduciary obligations and insisted that these are actually part of the director’s duties, failure of which may lead to personal action being taken. Ergo, in this case the court upheld the fiduciary duties of directors as stipulated by the law.

In the case of Il-Pulizija v Dr George Cassar, however, the Court of Criminal Appeal did take a side on the ambiguity of exec/non-exec directors and did hold a non-executive Chairman of a company liable. The director in question was charged with criminal offences that related to food safety, and despite him being a non-executive chairman, the Court concluded that if a person sits on the board of directors, they are duty-bound to exercise the due diligence that is requested of the board by law.

The court stood firm on the basis that the director could not avoid prosecution by remaining passive in their actions and the only way they could avoid liability would be by proving that they took all the necessary measures to prevent the infraction. Conclusively, this ruling established that anyone occupying a position on the board of directors could be held liable given the circumstances, no matter their status.

In contrast, the case of Il-Pulizija v Angelo Xuereb, Cecil Busuttil, Joseph Ellul Vincenti and John Gauci shows an adverse ruling. The defendants were all directors charged with an involuntary homicide on a construction site and the Court delved into their roles within the Board, and thus took a position to differentiate between them.

The only executive director with the remit of general operations was Xuereb, whilst Ellul Vincenti and Gauci were non-executive directors. In fact, Ellul Vincenti was an architect with specific duties and functions stipulated within the company statute, and he thus argued that he lacked the adequate powers to give orders and to carry out inspections. In a similar fashion, Gauci’s position too was devoid of managerial duties, and Xuereb testified to the fact that neither director (Vincenti Ellul & Gauci) were not involved in daily operations and would have not even known which site was being worked on.

Consequently, the court ruled that Gauci could not be held criminally responsible since his role was devoid of the responsibility of the workers in question. In short, as non-executive director, he was not expected to follow the works with such detail. The same reasoning was applied to Ellul Vincenti with a further nomination of his role as ‘direttur passiv’ (passive director), since the company’s statute made him responsible only for matters related to management meetings, not for construction matters.

Xuereb could have been held liable in view of his managerial role, however he was able to show and prove to the Court that he took all the necessary steps to ensure safety at the site. In conclusion, the Court found the victim the sole liable person in this case and work. The Court concluded that the negligence rested with the victim and named them the sole liable person. The crux of the case is that the Court enacted a surprising precedent despite the ambiguity of the law in the age-old debacle of differentiating between directors’ roles and as a consequence their duties and liabilities.  

Talk to Us

We Can Help!

MK Corporate Services can assist with your Company Setup, Directorships, and MoA!

This article has shown, via Maltese law and the case law that came out of its interpretations, how directors are legally bound by duties and can therefore be liable in cases of negligence. The next article will delve slightly deeper in the corporate world; Financial Services, public and Private companies, wrongful trading and fraudulent trading.

It is good to practise that companies have properly drafted MoA, internal company policies and procedures, a solid business plans, and more importantly directors and company secretaries with proper legal knowledge and commercial understanding to take the business forward while ensuring all legal and statutory obligations are properly adhered to. MK Corporate has garnered a wealth of knowledge and extensive experience in offering local directorship services, Company Formation, Corporate & Consultancy Services, Administration and Secretarial Services, and other services aimed to serve specific clients with distinct business needs. Contact us directly: infomalta@kyprianou.com

Talk to Us For a Free Consultation

The content of this article is valid as at the date of its first publication. It is intended to provide a general guide to the subject matter and does not constitute legal advice. We recommend that you seek professional advice on a specific matter before acting on any information provided. For further information, please contact us at MK Fintech Partners via email at infomalta@kyprianou.com or by telephone +356 2016 1010.