Why that director’s job could land you in jail

For the longest time, the law guiding operation of companies in Kenya was such that a stupid decision made by a director could withstand any legal challenge.

What is more, the law offered such a director immunity from those affected by the action.

It is this lacuna that has seen directors literally escape with murder, looting companies by stripping them of assets or manipulating financials to appear as if the company is doing well while the reverse is true.

Instances where companies are set up as avenues to defraud the public have been common.

This, however, is expected to change with the enactment of the new Companies Act, signed to law by President Uhuru Kenyatta early last month.

“One of the features of Cap 486 was the laxity with which many of its requirements were complied with.

However, the New Act can no longer be ignored or avoided on the grounds of lax application or lenient penalties,” explains a brief by Coulson Harney (CH) Advocates.

“Once the new law comes into operation, the comprehensive provisions, the extensive sanctions and potential consequences for company directors, officers and members will be serious.”

CORPORATE GOVERNANCE GUIDE

In an unprecedented move, company directors will now have to exercise a high level of responsibility and engage every decision carefully as a wrong move could land them in jail for as long as 10 years.

For starters, the new Act replaces and redefines the duties of company directors,  providing more clarity and imposing stringent fines for wayward directors.

Besides being expected to aspire to high standards in their normal roles, such as to act within their powers and to abide by the terms of the company’s memorandum and articles of association and decisions made by the shareholders, the new laws provide an additional list of mandatory rules to which the directors must adhered.

They include taking responsibility for the long-term consequences of their decisions, the interests of employees and high standards of business conduct.

For the first time in the history of Kenya, directors will be made to account for their executive decisions and in instances where they breach the law, they face a jail term or hefty fine.

The new Act also puts restrictions on the day-to-day conduct of directors in office.

To avoid conflicts of interest for instance, directors, will not be allowed to accept benefits from third parties and they will also have to declare an interest in a proposed transaction with the company.

Rogue directors who influence company decisions after receiving bribes will therefore be put under scrutiny.

“There will be an additional statutory obligation to declare interests in relation to existing transactions,” says CH.

Shareholder approval will also be a must for directors seeking to extend their stay for more than two years.

HEFTY PAY PACKAGES

And with company directors often indicted for giving themselves hefty pay packages, the new law places comprehensive controls on the right of companies to make payments to directors for loss of job. Such payments will be prohibited unless approved by shareholders.

The previous law was always flouted with no serious action taken against offenders.  However, the new Act can no longer be ignored or avoided on the grounds of lax application or lenient penalties.

Cabinet Secretary for Industrialisation Adan Mohamed has termed the new law a landmark.

The Capital Markets Authority has also welcomed the law with acting chief executive Paul Muthaura saying it will herald a new era of improved governance in companies.

Once the new law comes into operation, its comprehensive provisions, extensive sanctions and potential consequences for company directors, officers and members will be serious.

FINES

Companies and individual directors face civil and potentially criminal sanctions for non-compliance. The fines range from Sh100,000 to a staggering Sh15 million.

Many fines are in the Sh500,000 to Sh1 million range. Jail terms for indictable offences run from between one and five years, and in exceptional cases, for example fraud, 10 years.

With 1,026 sections running to more than 1,600 pages (without schedules) the new Act, according to CH, is by far the most extensive piece of legislation on the statute books in Kenya.

The new Act has drawn heavily from the Companies Act, 2006 of the United Kingdom.

“The scale of the new law is monumental. The comprehensiveness of its provisions will require a great deal of adjustment,” says CH.

One of the features of the new Act is that many provisions carry their own individual sanctions regime. Also, daily default fines are introduced.

SHAREHOLDERS RIGHTS

The new also Act gives shareholders a statutory right to pursue claims against the directors for fraud on behalf of a company (a derivative action), although the shareholders need the consent of the court to proceed with such a claim.

For the time being however the old Companies Act, Cap 486, will continue to operate until the corresponding or new provisions of the Companies Act, 2015 come into force through legal notices prepared by Industrialisation Cabinet Secretary Mr Adan Mohammed in the Kenya Gazette.