Directors' Duties, Responsibilities and Liabilities
This domain tests the content of directors' duties, to whom they are owed, and the consequences of breach. In Sri Lanka the statutory duties sit in the Companies Act No. 7 of 2007 and are read alongside common law principles.
The duties
- Good faith in the best interests of the company - honesty judged subjectively, with an objective floor of what is reasonable.
- Care, diligence and skill of a reasonably prudent person with that director's knowledge and experience.
- Acting within powers and for proper purposes - powers must not be used for an ulterior motive, such as entrenching control.
- Avoiding conflicts - disclose interests, do not vote on matters where conflicted, and never make a secret profit.
- No misuse of position or information, including inside information and corporate opportunities.
- Where the company is in financial distress, the interests of creditors acquire weight.
Liability and protection
Breach exposes directors to damages, repayment of profits, rescission of transactions, criminal liability for dishonest conduct, and disqualification. Ratification is possible only by fully informed, disinterested shareholders. Insurance and indemnities are common but cannot cover fraud or dishonesty. Directors may delegate but cannot abdicate; reliance on professional reports is protected only if reliance was reasonable.
Worked example
A managing director sells a warehouse to the company at above market value through another entity he controls, without board disclosure. He has breached the no-conflict and no-secret-profit rules. The transaction is voidable, he must account for the profit, and ratification requires full disclosure to disinterested shareholders. The audit committee should also assess recoverability and reporting obligations.
Traps that cost marks
Saying duties are owed to shareholders individually rather than to the company. Equating legality with duty. Assuming shareholder approval can cure fraud. Confusing negligence with dishonesty. Forgetting that nominee and joint directors carry the same duties and cannot hide behind their appointor.