Allan Hans Muhome Legal Consultant April

Transcription

1 Allan Hans Muhome Legal Consultant tmuhome@gmail.com

2 PART TWO Directors qualifications and duties Company secretaries Accounts and Auditors Liquidation of a Company Insolvency Act [peep thru only] 2013 Exploring Key Changes 2 of 25

3 1.A De Jure Director (a director from law) is is properly appointed to the board and registered with Registrar of Companies - A registered director. 2.A De Facto Director (a director in fact or in reality) - not properly appointed and registered but who acts as a director. 3. Alternate Director a person appointed by a director to act when he cannot. 4.A Casual Director fills a casual vacancy that arises between annual shareholders meetings coz of death/resignation. 5.A Shadow Director one in accordance with whose instructions the Board acts or is accustomed to acting. (not a professional advisor) 6.Nominee Director - a shareholder/creditor/employees rep. 7.Executive (2 contracts employee and director) and Nonexecutive (single contract as director - Independent) 3 of 25

4 A private co. must have at least one director. Previously all companies were required to have three directors which is now the case for Plcs only. One director must be resident in Mw for all companies [S. 162] WHY?. The CA 2013 regulates directors service contracts for Plcs [S ]. Every company must keep 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 a director is required to take up shares and fails. 4 of 25

5 APPOINTMENT- (1) First directors are the ones named in the application for registration [S. 166(1)]. (2) Subsequent directors are appointed by an ordinary resolution [S. 166(2)]. (3) The High Court has been granted power to appoint a director where there are no directors or are not quorate [S. 167 ]. (4) The Registrar may 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 an ordinary resolution at a General Meeting; a director of a Private co. may be removed from office by special resolution [S. 169]. VACATION may arise through non-eligibility (e.g. turns 70 for a Plc; adjudged bankrupt or of unsound mind) resignation, death or other qualification in the constitution. 5 of 25

6 Being a director is easy. Being a responsible director is not. Being a responsible director means more than just acting with honesty and integrity and using talents to the company's best advantage. It means developing an understanding and awareness of the ever increasing legal obligations and responsibilities being placed on directors, breach of which can give rise to personal liabilities under the civil and criminal law and even disqualification from holding office as a director - Charles Russel, Directors Responsibilities Exploring Key Changes 6 of 25

7 1) Duty to Act in Accordance with the Constitution [S. 176] Minors ill placed Masangano v Masangano (2014). S 39 Co to act intra vires. 2) Duty to use powers for a proper purpose [S. 176] - wrong to issue shares just o alter balance of votes- Bamford v Bamford [1970]. 3) Duty to promote the success of the company [S. 177] a number of factors for consideration are provided e.g. the likely consequences of any decision in the long term; the interests of employees, creditors, suppliers, customers and others; the impact of the company'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) 7 of 25

8 5) Duty of care and skill [S. 179] Re City Equitable Fire Insurance [1925] - Director to exercise average skill in accordance with his experience and skill. 6) Duty not to accept benefits from 3 rd parties [S. 181] 7) Duty to avoid conflict of interest [S. 180] Presscane Ltd v Patel - use of mgt accounts by director against his co in court 8) Duty to declare interest [S. 182]. A director is obliged to declare the same to the Board of directors. Such transactions may be voided by the company within six months from the date of the declaration unless the company has received fair value under it [S ]. 8 of 25

9 9) Duty against inside dealings [S. 194] [also Securities Act 2010] Diamond v Oreamuno (1969) [USA] -Directors who sold their shares at a higher value, knowing the next day the shares would loss their value were guilty of insider trading had to refund difference. 10) Duty as to the company s solvency (Wrongful Trading) A director of a company who believes that the company is unable to pay its debts as they fall due is obliged to forthwith call a meeting of the Board to consider whether the Board should appoint a liquidator or an administrator. [S. 222(1)] and disclose the same to the Director of Insolvency (if Plc)[S. 11 Insolvency Act 2016]. 11) Duty to comply with the code of corporate governance The Act has adopted the comply or explain UK approach. It provides that the prescribed code is only directory in nature but the Court, the Registrar or any authority is entitled to have regard to it. 9 of 25

10 Remedies for breach of directors statutory duties are the same as 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 line with the provisions of the CA [General fine K5 m S. 381 R v Lutepo (2015)] 7. Lifting the Corporate Veil NBM v Nya Ndovie Ker (2007). 8. The Minister, Registrar or the Registrar of Financial Institutions in the case of Plcs, may appoint inspectors to investigate the affairs of a co. and breaches found may be criminally prosecuted with the consent of the Director of Public Prosecutions [S 331(1)]. 10 of 25

11 Requirement- Under the CA 1984, every company was required to have a co. secretary which requirement remains for Plcs only [S. 68, 156] hence register of Co. secretaries remains for Plcs only [S. 227]. [Financial Institutions also under financial laws]. Qualifications of Secretaries of Plcs [S. 225] A person who appears to directors to have the requisite knowledge and experience to discharge the functions of secretary of the co; OR has the following qualifications:- 1. that he has held the office of secretary of a public co. for at least three of the five years immediately preceding his appointment as secretary; or 2. that he is a member of any professional body of co. secretaries in Malawi (IS THERE ONE?). 11 of 25

12 The Board is under obligation to cause accounting records to be kept that, among others, correctly record and explain the transactions of the co. and enable the financial position of the co. to be determined with reasonable accuracy [S. 229]. Financial Statements must be completed, signed by director/s for all companies [S. 245]. The Board of every co. must, within six months after the balance sheet date of the co. prepare an annual report and accounts. [S. 251(2)]. This does not apply to a one person co. [S. 251(4)]. Shareholders of a private co. may also resolve by unanimous resolution against this [S. 251(3)]. IS THIS ANY GOOD FOR INVESTOR CONFIDENCE? 12 of 25

13 No need for an Internal Auditor (unless a Financial Institution under the FSA 2010 S. 55) Requirement - The CA 1984 required that every co. have an auditor. In contrast, the CA 2013 makes no such requirement for private companies and dormant companies [S 191(1)]. Only plcs to have auditors [& Financial Institutions under financial laws]. [ICAM again argued that audited accounts instill confidence in stakeholders such as Banks, creditors, investors, MRA ] WHAT IS YOUR VIEW? DO AUDITORS EXORBITANT FEES JUSTIFY THIS? EASE OF DOING BUSINESS INDEX? 13 of 25

14 Appointment (1) first auditor may be appointed by directors (2) Subsequently, appointed at each annual meeting (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 as auditors e.g. one member must be ordinarily resident in Malawi; some partners must be qualified for appointment; no member of the firm is indebted to the co. or a related co. unless the debt is in the ordinary course of business e.t.c. [S. 233] 14 of 25

15 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 for misconduct; 5.One convicted of theft, fraud, forgery or perjury; 6.A person disqualified from registration under the law. 15 of 25

16 1. A director CA 2013 [S. 234(2)] Ineligible e.g. 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 in Malawi. WHY Conflict of Interest WHY? 16 of 25

17 Duties avoid conflict [S. 240], Duty to make a report to shareholders [S. 241] Accounts to be signed in the name of the 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 statements give a true and fair view of the matters covered and where they do not, the respects in which they fail to do so; 4.Whether the financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and the CA An auditor is required to carry out the audit in accordance with International Standards on Auditing. 17 of 25

18 Insolvency Act 2016 [S. 11] - Auditor of a public company to disclose insolvency or serious financial difficulties of the co. to the Director of Insolvency. Financial Services Act The Registrar may require an external auditor to make a report to him and hold a meeting. [S. 56 & 57] 2. Auditor to inform the Registrar of the insolvency of a financial institution or contravention of the FSA or other laws, regulation or directives or condition imposed on its licence. [S. 58] 3. Auditor must verify returns and other reports of a financial institution which the Registrar may from time to time require to be verified. [S. 58] 18 of 25

19 Rights access information [S. 242], receive notice, attend & speak at shareholders meetings [S. 243]. Where the board fails to comply with these requirements every director is liable to a fine. S. 20 of the Public Accountants and Auditors Act - an auditor who certifies accounts where he was denied information or does not comply with the law commits an offence and may be disciplined. 19 of 25

20 Liabilities auditors are liable in the tort of negligence Caparo Industries plc v Dickman [1990] Caparo Plc was a shareholder in a co. It purchased more shares in the co. Later brought an action against the auditors of the co. for negligent overstatement of the pre-tax profit of the co. IS THE CLAIM SUSTAINABLE IN COURT? 20 of 25

21 House of Lords held that the work done by the auditors was for the benefit of the co, that is, not for the benefit of individual shareholders but for the benefit of the shareholders collectively. Therefore, no duty of care was owed by the auditors to outside investors who may see the accounts before buying shares. Nor, for example, was a duty of care owed by the auditors to a bank which was considering lending money to a company on the basis of the audited accounts. Further, the auditors did not owe a duty to existing individual shareholders. But a special relationship may exist between the auditor and a third party. 21 of 25

22 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 make representations (oral/written) to the shareholders [Co to pay for the same]. In respect to an auditor of a financial institution, his removal before expiry of his term only becomes effective on approval from the Registrar of Financial Institutions [s. 60 FSA]. Resignation - Where an auditor gives the board written notice that he does not wish to be reappointed, the board must, if requested to do so by that auditor, distribute to all shareholders and to the Registrar, at the expense of the co., a written statement of the reasons. An auditor may resign prior to the annual meeting by giving notice. 22 of 25

23 The CA 1984 provided comprehensively for winding up of companies 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 be governed by the Insolvency Act, 2016 which will apply to all companies incorporated or registered under the CA 2013 [S. 329,330]. The Insolvency Act has however maintained the modes of winding up namely; (1) Compulsory (Court order) (2) Members Voluntary (Declaration of Solvency) and Creditors Voluntary (No declaration of solvency) 23 of 25

24 A robust insolvency system ensures the survival of economically efficient companies and reallocation of resources of inefficient ones. Fast and cheap insolvency proceedings result in the speedy return of businesses to normal operation and increases returns 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] 24 of 25

25 THANK YOU FOR YOUR ATTENTION Allan Hans Muhome 24 of 25