A company’s business activities must ultimately be conducted by individuals — company directors — notwithstanding that a company has a distinct legal personality.

Directors may, subject to the company’s by-laws, exercise all the powers of the company except those powers that are required by the Companies Act 1981, as amended (the “Act”) or the by-laws to be exercised by the members (shareholders) of the company.

Typically, by-laws confer wide powers of management to the directors, who are, in effect, agents for the company in relation to any transaction into which they enter on behalf of the company, and trustees for the company as it relates to the company’s funds and property.

In addition to the trusteeship of the company’s property, a director is subject to various obligations parallel to those of a strict trustee. For example, the duty not to put himself in a position where the interest of the company conflicts with his personal interest and the duty not to make a profit out of his position as director unless the company permits him to do so.

However, directors are not trustees in the full sense, the significant difference being that the legal title to the company’s property is vested in the company — a director’s relationship with the company is that of a fiduciary.

The relationship between directors and members finds expression in section 91 of the Act and provides that subject to the Act and the company’s by-laws, the affairs of the company shall be managed by its directors and that the directors may exercise all the powers of the company.

However, where a director is not authorised to act, either in meeting or by written resolution, he is in breach of authority (although such acts are capable of being ratified by the company’s members in general meeting or by a properly convened board meeting provided that the acts did not cause the company to act ultra vires — beyond its corporate capacity).

The board may delegate any of its powers to a person or committee, which may consist even of a single director; however, each director does not alone have power to bind the company unless he has had his power specifically conferred on him or delegated to him.

For example, if an asset were sold by a duly appointed director, in the absence of a properly convened director or shareholder meeting or written resolution approving or ratifying the sale, the director would have exceeded his authority. However, subject to the law governing the sale of the asset, a purchaser would be entitled to regard the director as being properly authorised and as such, the company would be bound by the sale unless the purchaser had notice of the lack of authority. A party to a transaction with the company is not required to enquire whether the transaction is permitted by the company’s by-laws or as to any limitation on the powers of the board of directors or a particular director to bind the company.

In such circumstances, there could be an action by the company against the director for loss suffered as a result of selling the asset without authority. As fiduciaries, directors are liable to compensate those to whom their duties are owed for such losses.

If a director has exceeded his authority (and in the absence of a ground for relief) a claim for the appropriate remedy or remedies may be sought and instituted by the company. Likewise, where two or more directors are implicated in the same breach of duty, their liability is joint and several. In a transaction where the company’s assets have been misappropriated, the director(s) will be liable for the total amount misappropriated.

However, a director is not the agent for co-directors of the company; the mere fact that a particular director is liable to the company for a breach of duty is not enough of itself to render the remaining directors liable as well.

The basic premise is that the directors of a company act as a board. When they do so, the company will be bound by their acts, if they are within the scope of the directors’ collective authority.

Accordingly, directors should read and understand the company’s constitution, understand all of the company’s legal obligations, and understand the legal liabilities that both they (in their personal capacity) and the company face.

Although the above may appear daunting to a prospective or existing director, the key points for a director to bear in mind are to act honestly and in good faith, exercising the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. A director should also adopt the highest standards of propriety in conduct and where/when appropriate, seek and act upon competent professional advice.

Provided these ‘tests’ are met, a director can feel reasonably confident about the role he is undertaking.

Lawyer Seth Darrell is an Associate and a member of the Corporate and Commercial Practice Group at Appleby. A copy of this column can be found on the Appleby website at www.applebyglobal.com. This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.