Directors' Duties Under the Companies Act, 2015: A Comprehensive Guide

Introduction

The role of a company director carries significant legal responsibilities. In Kenya, the Companies Act, 2015 (the "Act") replaced the former Companies Act (Cap 486) and introduced a modern, codified framework for directors' duties that aligns with international best practice. Understanding these duties is essential for anyone serving as a director — whether of a large listed corporation, a private company, or a small family business.

The seven general duties codified in Part XI of the Act are owed by a director to the company, not to individual shareholders. However, shareholders may bring derivative actions on behalf of the company where directors have breached their duties. The duties apply to all directors, including non-executive directors, alternate directors, and shadow directors — persons in accordance with whose directions or instructions the directors of a company are accustomed to act.

The Legal Framework: Seven General Duties

1. Duty to Act Within Powers (Section 142)

A director must act in accordance with the company's constitution and must only exercise powers for the purposes for which they were conferred. This means that directors cannot use their powers for personal benefit or for purposes that fall outside the company's objects. The constitution — comprising the Memorandum and Articles of Association — defines the boundaries of a director's authority. Where a director acts beyond these boundaries, the act may be voidable at the instance of the company.

In practical terms, directors should familiarise themselves thoroughly with the company's constitutional documents and any shareholder resolutions that delegate or restrict powers. Board resolutions authorising specific actions should clearly reference the constitutional authority being exercised.

2. Duty to Promote the Success of the Company (Section 143)

A director must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In doing so, the director must have regard to a non-exhaustive list of factors including the likely consequences of any decision in the long term, the interests of the company's employees, the need to foster the company's 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 members of the company.

This duty is subjective — the test is what the director honestly believed to be in the company's best interests — but it is not unlimited. A director who acts in bad faith or for an improper purpose cannot shelter behind a claim of honest belief. Where a company is insolvent or approaching insolvency, this duty shifts, and the directors must consider the interests of creditors above those of shareholders.

3. Duty to Exercise Independent Judgment (Section 144)

A director must exercise independent judgment. This does not prevent a director from acting in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or from acting in a way authorised by the company's constitution. However, a director must not simply follow the instructions of a controlling shareholder or fellow director without applying their own mind to the matter.

Non-executive directors and nominee directors must be particularly mindful of this duty. A nominee director appointed by an investor or shareholder owes their duties to the company, not to the appointing party. While they may take into account the interests of their appointer, they must not subordinate the company's interests to those of the appointer.

4. Duty to Exercise Reasonable Care, Skill and Diligence (Section 145)

A director must exercise the care, skill, and diligence that would be exercised by a reasonably diligent person with both the general knowledge, skill, and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company (an objective standard), and the general knowledge, skill, and experience that the director actually has (a subjective standard). This dual test means that a director with specialist qualifications — such as a lawyer, accountant, or financial analyst — will be held to a higher standard than a director without such qualifications.

In practice, this duty requires directors to prepare adequately for board meetings, read board papers, ask relevant questions, seek professional advice where they lack expertise, and monitor the company's affairs with reasonable diligence. Delegation to management is permitted, but the duty to supervise cannot be delegated entirely.

5. Duty to Avoid Conflicts of Interest (Section 146)

A director must avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. This duty is strict and applies to the exploitation of any property, information, or opportunity regardless of whether the company could take advantage of the property, information, or opportunity. It does not apply to a transaction or arrangement with the company itself — those are covered by the duty to declare interests.

The duty is not infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest, or if the matter has been authorised by the other directors. For private companies, the constitution may contain provisions permitting directors to authorise conflicts. For public companies, the constitution must contain an express authorisation provision.

6. Duty Not to Accept Benefits from Third Parties (Section 147)

A director must not accept a benefit from a third party conferred by reason of being a director, or by reason of doing (or not doing) anything as director. This includes financial and non-financial benefits. The duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. In practice, companies should establish clear policies on gifts, hospitality, and benefits that directors and senior management may receive.

7. Duty to Declare Interest in Proposed Transaction (Section 148)

If a director is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, they must declare the nature and extent of that interest to the other directors before the company enters into the transaction. The declaration may be made at a board meeting, by written notice, or by general notice. A director who fails to declare an interest commits an offence and is liable to a fine. The transaction itself may be voidable at the instance of the company.

Personal Liability and Consequences of Breach

The consequences of breaching directors' duties can be severe. The company may bring civil proceedings against a director for breach of duty, seeking remedies including damages for any loss suffered by the company, an account of profits made by the director from the breach, rescission of any transaction entered into in breach of duty, and an injunction restraining the director from acting in breach of duty.

In addition to civil liability, the Act provides for criminal sanctions in certain cases, including failure to declare interests (Section 148), fraudulent trading (Section 989), and breach of restrictions on loans to directors (Part XII). Directors may also face disqualification under the Act, preventing them from acting as a director of any company for a specified period.

Under Section 989 of the Act, if in the course of winding up a company it appears that any business of the company has been carried on with intent to defraud creditors, a director who was knowingly a party to the fraud may be personally liable for the debts and liabilities of the company as the court may direct. This provision underscores the importance of maintaining high standards of corporate governance, particularly when a company faces financial difficulties.

Practical Implications for Boards and Directors

Understanding the legal framework is essential, but directors must also translate these obligations into practical governance processes. The following recommendations apply to directors of companies of all sizes in Kenya.

First, directors should ensure that the company maintains a comprehensive conflicts register. Before any transaction is discussed at a board meeting, directors should consider whether any conflict of interest arises and make appropriate declarations. The minutes should record any declarations and any decisions to authorise or ratify conflicts.

Second, boards should adopt written governance frameworks that establish clear terms of reference for the board and any committees, define the scope of management authority and reserved matters, set out procedures for declaring and managing conflicts, establish policies on related party transactions, and provide for regular review of the company's constitutional documents.

Third, directors should maintain adequate directors' and officers' (D&O) insurance. While insurance cannot protect against criminal liability or deliberate breach of duty, it can provide important protection against the costs of defending claims and potential civil liability for honest errors of judgment.

Fourth, directors approaching insolvency should seek professional advice immediately. The shift in fiduciary duty from shareholders to creditors when a company is insolvent or nearing insolvency is a critical juncture that requires careful navigation. Continuing to trade while insolvent, or incurring debts with no reasonable prospect of repayment, exposes directors to significant personal liability under the wrongful trading and fraudulent trading provisions of the Act.

Compliance Risks

Directors face heightened compliance risks in several common business scenarios. Related party transactions present one of the most common areas of risk, particularly in closely held companies where directors may also be shareholders. The Act requires disclosure and, in certain cases, shareholder approval for substantial property transactions with directors (Section 157), loans to directors (Sections 161–168), and directors' service contracts exceeding certain thresholds (Section 155). Failure to comply with these requirements can result in the transaction being voidable and the director being liable to account for any gain made.

Corporate opportunities present another significant area of risk. Where a director becomes aware of a business opportunity through their position, they may not exploit that opportunity for personal benefit without first offering it to the company and obtaining proper authorisation. The case law on corporate opportunities is well-developed internationally and Kenyan courts are likely to follow similar principles.

Conclusion

The codification of directors' duties in the Companies Act, 2015 has brought welcome clarity to the obligations of company directors in Kenya. The seven general duties provide a comprehensive framework that directors can use to guide their conduct, and the remedies available for breach underscore the seriousness with which the law treats these obligations.

For directors, the message is clear: understand your duties, act in good faith and with reasonable diligence, manage conflicts proactively, and seek professional advice when faced with complex or unfamiliar situations. For companies, investing in sound corporate governance frameworks is not merely a compliance exercise — it is a foundation for sustainable business success.