UNIVERSITY OF NAIROBI

FACULTY OF LAW
GPR: 323 SHALOM RUGARI
G34/38118/2016
LAW OF BUSINESS ASSOCIATIONS

Question
“Corporate executives are today possessed of immense powers which must
be regulated not only for the public good but also for the protection of those
whose investments are involved. Directorships will always be susceptible of
abuse. Directors can capitalize on the strategic position in the company to
serve their own interests as in contemporary times management and
shareholder ship control are largely divorced. The law, therefore, continues
to struggle against their wiles and imposes upon them certain duties which,
when properly enforced will without driving away from the field competent
persons, materially reduce the chances of abuse and subjection to strict
accountability.” Discuss this statement in the light of the Kenya Companies
Act 2015, which replaced the previous Companies Act; Chapter 486, Laws
of Kenya, and pre-existing relevant common law case law.
A clear and concise articulation of the general duties of the directors is set out in the Third schedule
Part 2, Division 1, section 2 of the Companies (General) Regulations,1 which provides that the
directors are responsible for managing the business and affairs of the company and may exercise all
the powers of the company (subject to the Companies Act and the company’s articles of association).
It also stipulates that any alteration of the articles of association does not invalidate any prior act of the
directors that would have been valid if the alteration had not been made; however, the powers given to
the directors under section 2(3)2 are not limited by any other powers given to the directors by other
provisions. The directors are to exercise all powers exercisably at a meeting where a quorum is present
under s.2(4).3
Furthermore, the duties of the directors are set out in Division 3 of the Companies Act4 but more
specifically Sections 140, 142, 143, 144, 145, 146, 147 and 151. The old Companies Act (Cap 486)5
also referenced (and is often comparatively used with the new dispensation) which provides for the
powers and duties of the directors under Part I section 80-87. Section 140(3&4) of the Companies
Act 20156 states that the general duties of the directors are based on common law rules and equitable
principles which are also to be interpreted and applied in the same way as common law rules and
equitable principles. The duties to the company are owed by each Director individually which duties
are owed to the company alone and not to individual shareholders. 7 This was reiterated in the case of
Percival v Wright8 where it was held that directors were not agents for the individual shareholders.
The duties of the directors fall into two broad categories: -
 Duties of care and skill in the conduct of the company’s affairs
 Fiduciary duties of loyalty and good faith.9
Duties of care and skill in the conduct of the company’s affairs
The locus classicus for this duty is Re City Equitable Fire Insurance Co 10 where it was held that the
directors were negligent and Justice Romer stated that, “A Director need not exhibit in the
performance of his duties a greater degree of skill than may reasonably be expected from a person of
his knowledge and experience.” This position was further reiterated in case of Re Brazilian Rubber &
Plantations Estates Ltd11 where Justice Neville stated that, “It has been laid down that so long as
1
The Companies (General) Regulations, 2015
2
Ibid
3
Ibid
4
The Companies Act, 2015
5
The Companies Act (Cap 486)
6
The Companies Act, 2015
7
<https://www.coursehero.com/file/19177807/Law-of-Business-Associations/>
8
Percival v Wright (1902) 2 Ch. 421
9
<https://www.coursehero.com/file/19177807/Law-of-Business-Associations/>
10
Re City Equitable Fire Insurance Co. (1925) Ch. D 447
11
Re Brazilian Rubber & Plantations Estates Ltd. (1911) 1 Ch. 405
they act honestly, Directors cannot be made responsible in damages unless they are guilty of gross
negligence. A Director’s duty requires him to act with such care as is reasonably expected from his
having regard to his knowledge and experience. He is not bound to bring any special qualifications to
his office. He may undertake the Management of a Rubber Company in complete ignorance of
anything connected with Rubber without incurring responsibility for the mistakes which may result
from such ignorance. While if he is acquainted with the Rubber business, he must give the company
the advantage of his knowledge when transacting the company’s business. He is not bound to take any
definite part in the conduct of the company’s business but insofar as he undertakes it he must use
reasonable care.12 Such reasonable care must be measured by the care an ordinary man might be
expected to take in the same circumstances on his own behalf.”
This duty of care and skill is catered for under sections 142, 143, 144, 145 & 146 of the Companies
Act13. Section 142 of the Companies Act14 (which deals with the duty of a director to act within
powers) states that, a director of a company shall act in accordance with the constitution of the
company and only exercise powers for the purposes for which they are conferred. This means that a
company director shall not exercise powers outside of which he/she is mandated. Section 14315 (which
provides for the director’s duty to promote the success of the company) further states that: - A
director of a company shall act in the way in which the director considers, in good faith, would
promote the success of the company for the benefit of its members as a whole, and in so doing the
director shall have regard to—
(a) the long-term consequences of any decision of the directors;
(b) the interests of the employees of the company;
(c) the need to foster the company's business relationships with suppliers, customers and
others;
(d) the impact of the operations of the company on the community and the environment;
(e) the desirability of the company to maintain a reputation for high standards of business
conduct; and
(f) the need to act fairly as between the directors and the members of the company.
Section 14416 (duty of director to exercise independent judgement) goes further ahead to state that:
- (1) A director of a company shall exercise independent judgment.
(2) The duty under subsection (1) is not infringed by the director acting—

12
<https://www.coursehero.com/file/19177807/Law-of-Business-Associations/>
13
The Companies Act, 2015
14
Ibid
15
Ibid
16
Ibid
 (a) in accordance with an agreement duly entered into by the company that restricts the future
exercise of discretion by its directors; or
(b) in a way authorised by the constitution of the company.
Furthermore section 14517 (provides for the duty of the director to exercise care, skill, and
diligence) provides that: -
In performing the functions of a director, a director of a company shall exercise the same care,
skill and diligence that would be exercisable by a reasonably diligent person with—
(a) the general knowledge, skill and experience that may reasonably be expected of a
person carrying out the functions performed by the director in relation to the company..
(b) the general knowledge, skill, and experience that the director has.
The duty of care and skill in conducting the company’s affair is also exhibited in section 14618 of the
Companies Act which provides for the duty of a director to avoid conflict of interest and it states
that: -
(1) A director of a company shall avoid a situation in which the director has, or can have, a
direct or indirect interest that conflicts, or may conflict, with the interests of the company.
(2) Subsection (1) applies in particular to the exploitation of—
(a) any property;
(b) confidential information of the company;
(c) the director's position in the company; or
(d) opportunities in or for the company:
Section 146(12) of the Companies Act19 further to ensures compliance by stating that, a director who
contravenes this section commits an offence and is liable on conviction to disqualification for a period
not exceeding five years.
Fiduciary Duties of Loyalty and good faith
The Director’s fiduciary duties are divisible into 4 subcategories20: -

The Directors must always act bona fide in what they consider and not what the courts may
consider to be in the best interest of the company. Directors must act in accordance with the
articles of association at all times, only exercising their powers for their proper purposes;21 this
is provided for under section 143 of the Companies Act22 which stipulates that the directors

17
Ibid
18
Ibid
19
Ibid
20
<https://www.coursehero.com/file/19177807/Law-of-Business-Associations/>
21
<https://www.1stformations.co.uk/blog/10-duties-company-director/>
22
The Companies Act, 2015
 have a duty to promote the success of the company. In this context, the term company means
the present and future members of the company on the basis that the company will be
continued as a going concern thereby balancing long-term view against short term interests of
existing members.
The directors must always exercise their powers for the particular purpose for which they were
conferred and not for extraneous purposes even if the latter are in the best interests of the
company; which duty is conferred upon the directors by section 142 of the Companies Act.23
For example, the Directors are invariably empowered to issue capital and this power should be
exercised for only raising more funds when the company requires it. Hence it will be a breach
of the Directors’ duties to issue the company shares for the purpose of entrenching themselves
in the control of the company’s affairs. This was exhibited in the case of Punt v Symons24
where the directors issued shares with the object of creating a sufficient majority to enable
them to pass a special resolution depriving the other shareholders of some special rights
conferred upon them by the company’s articles. It was held that a power of a kind exercised by
the Directors in this case was a power which must be exercised for the benefit of the company.
Primarily this power is given to them for the purpose of enabling them to raise capital for the
purposes of the company. Therefore, a limited issue of shares to persons who are obviously
meant and intended to secure the necessary statutory majority in an interest was not a fair and
bona fide exercise of the power.
They must not fetter their displeasure to act for the company for example, the directors cannot
contract either among themselves or with third parties as to how they will vote at future Board
meetings. However, where they have entered a contract on behalf of the company, they may
validly agree to take such further action at Board meetings as maybe necessary to carry out
such a contract.
As fiduciaries the Directors must not place themselves without consent of the company in a
position in which there is a conflict between their duties to the company and their personal
interests. Good faith must not only be done but it must also manifestly be seen to be done. The
law will not allow the fiduciary to place himself in a position where he will have his judgments
to be biased and then argue that he was not biased; which is provide for under section 146 of
the Companies Act.25 This principle applies particularly when a Director enters a contract with
his company or where he makes any secret profit by being a Director. As far as contracts are

23
Ibid
24
Punt v. Symons (1903) 2 Ch. 506
25
The Companies Act, 2015
 concerned a contract entered into by the Board on behalf of the company and another Director
is governed by the equitable principle which ordains that a fiduciary relationship between the
Director and his company vitiates such contracts. Such contract is therefore voidable at the
instance of the company. Reference may be made to the case of Aberdeen Railway v Blaikie26
The Defendant company entered a contract to purchase a quantity of chairs from the Plaintiff
partnership. At the time that the contract was entered into a Director of the company was also
one of the partners. The issue was, was the company entitled to avoid the contract? The court
held that the company was entitled to avoid the contract. The Judge said that, “as a body
corporate can only act by agents and it is the duty of those agents so to act as best to promote
the interests of the corporation whose affairs they are conducting. Such an agent has a duty of
a fiduciary nature to discharge towards his principal. It is a rule of universal application that
no one having such duties to discharge shall be allowed to enter into or can have a personal
interest conflicting or which may possibly conflict with the interests of those whom he is bound
to protect..”27
The director’s fiduciary duties are also provided for in the Companies Act28 under section 147.29 This
is the duty of the director not to accept benefits from third parties by virtue of the fact that he/she is a
director of the said company so as to avoid a conflict of interest while conducting company business.
The section also creates an enforcement mechanism by stating under section 147(5)30 that, a person
who contravenes that section commits an offence and is liable on conviction to a fine not exceeding
one million shillings. Section 151 of the Companies Act31 elaborates that a director has the duty to
declare an interest in proposed or existing transaction or arrangement in the company’s business and
failure to do so by any director contravenes the section which is an offence and is liable on conviction
to a fine not exceeding one million shillings. Section 151 can be read together with section 190
Division 7 of the Companies Act32 which provides for the contract a director is given by the company
to perform services (as director or otherwise) for the company, or for a subsidiary of the company.
Section 193 Division 8 of the Companies Act33 requires a director who contracts with a sole member
(also being the director of the company) to put that contract into a written memorandum or recorded in
the minutes of the first meeting of the directors of the company following the making of the contract.
The section further enforces the provisions that “if a company fails to comply with this section, the
26
Aberdeen Railway v. Blaikie (1854) 1 Macc. 461
27
<https://www.coursehero.com/file/19177807/Law-of-Business-Associations/>
28
The Companies Act, 2015
29
Ibid
30
Ibid
31
Ibid
32
Ibid
33
Ibid
company and the director commit an offence and on conviction are each liable to a fine not exceeding
two hundred thousand shillings.” Section 197 Division 9 of the Companies Act34 also provides the
directors’ duty to disclose qualifying indemnity provision in directors’ report at the end of the financial
year.
Section 80-87 Part I of the old Companies Act (Cap 486)35 also sets out certain duties of the
directors; it provides that: -
The business of the company shall be managed by the directors, who may pay all expenses
incurred in promoting and registering the company, and may exercise all such powers of the
company as are not, by the Act or by these regulations, required to be exercised by the company in
general meeting, subject, nevertheless, to any of these regulations, to the provisions of the Act and
to such regulations, being not inconsistent with the aforesaid regulations or provisions, as may be
prescribed by the company in general meeting; but no regulation made by the company in general
meeting shall invalidate any prior act of the directors which would have been valid if that
regulation had not been made.
The directors may from time to time and at any time by power of attorney appoint any company,
firm or person or body of persons, whether nominated directly or indirectly by the directors, to be
the attorney or attorneys of the company for such purposes and with such powers, authorities and
discretions (not exceeding those vested in or exercisable by the directors under these regulations)
and for such period and subject to such conditions as they may think fit, and any such powers of
attorney may contain such provisions for the protection and convenience of persons dealing with
any such attorney as the directors may think fit and may also authorize any such attorney to
delegate all or any of the powers, authorities and discretions vested in him.
The company may exercise the powers conferred by section 37 of the Act with regard to having an
official seal for use abroad, and such powers shall be vested in the directors.
The company may exercise the powers conferred upon the company by sections 121 to 124 (both
inclusive) of the Act with regard to the keeping of a branch register, and the directors may (subject
to the provisions of those sections) make and vary such regulations as they may think fit respecting
the keeping of any such register.
(1) A director who is in any way, whether directly or indirectly, interested in a contract or
proposed contract with the company shall declare the nature of his interest at a meeting of
the directors in accordance with section 200 of the Act.

34
Ibid
35
The Companies Act, (Cap 486)
 (2) A director shall not vote in respect of any contract or arrangement in which he is
interested, and if he shall do so his vote shall not be counted, nor shall he be counted in the
quorum present at the meeting, but neither of these prohibitions shall apply to—
(a) any arrangement for giving any director any security or indemnity in respect of
money lent by him to or obligations undertaken by him for the benefit of the
company; or
(b) to any arrangement for the giving by the company of any security to a third
party in respect of a debt or obligation of the company for which the director
himself has assumed responsibility in whole or in part under a guarantee or
indemnity or by the deposit of a security; or
(c) any contract by a director to subscribe for or underwrite shares or debentures
of the company; or
(d) any contract or arrangement with any other company in which he is interested
only as an officer of the company or as holder of shares or other securities,
and these prohibitions may at any time be suspended or relaxed to any extent, and either
generally or in respect of any particular contract, arrangement, or transaction, by the
company in general meeting.
(3) A director may hold any other office or place of profit under the company (other than
the office of auditor) in conjunction with his office of director for such period and on such
terms (as to remuneration and otherwise) as the directors may determine and no director
or intending director shall be disqualified by his office from contracting with the company
either with regard to his tenure of any such other office or place of profit or as a vendor,
purchaser or otherwise, nor shall any such contract, or any contract or arrangement
entered into by or on behalf of the company in which any director is in any way interested,
be liable to be avoided, nor shall any director so contracting or being so interested be
liable to account to the company for any profit realized by any such contract or
arrangement by reason of such director holding that office or of the fiduciary relation
thereby established…
(5) Any director may act by himself or his firm in a professional capacity for the company,
and he or his firm shall be entitled to remuneration for professional services as if he were
not a director; provided that nothing herein contained shall authorize a director or his firm
to act as auditor to the company.
All cheques, promissory notes, drafts, bills of exchange and other negotiable instruments, and all
receipts for moneys paid to the company, shall be signed, drawn, accepted, endorsed or otherwise
 executed, as the case may be, in such manner as the directors shall from time to time by resolution
determine.
The directors shall cause minutes to be made in books provided for the purpose —
(a) of all appointments of officers made by the directors;
(b) of the names of the directors present at each meeting of the directors and of any committee of
the directors;
(c) of all resolutions and proceedings at all meetings of the company, and of the directors, and of
committees of directors, and every director present at any meeting of directors or committee of
directors shall sign his name in a book to be kept for that purpose.
The directors on behalf of the company may pay a gratuity or pension or allowance on retirement
to any director who has held any other salaried office or place of profit with the company or to his
widow or dependants and may make contributions to any fund and pay premiums for the purchase
or provision of any such gratuity, pension or allowance.
Furthermore, under Part VI sections 41 & 42 of the Companies (General) Regulations,36 more
duties are set out for the directors with regards to the requirements to be stipulated in their reports at
the end of the financial year. Under the Third schedule, Part 5, Division 2, section 102(2) of the
Companies (General) Regulations37 directors are required to ensure that its common seal is made
from a durable metal that has the company’s name engraved on it in legible form. Directors are also
responsible for the overall leadership of an organization collectively. Ordinarily, the following are
some of the board roles: -38
 Overall leadership of the organization.
 Review and approval of audited financial statements.
 Appointment of senior executives in an organization.
 Review and approval of relevant company policies.
 Review and approval of company strategies and investment initiatives.
 Approval of the company budget.
 Appointment of the company secretary.
 Appointment of auditors and directors to fill casual vacancy(s), among other roles.
Additional responsibilities for directors are enshrined in the articles of association. Executive
directors’ duties are also included in their contracts and appointment letters;39 Directors also owe the
company a duty of confidentiality particularly because they would have access to all the relevant
36
The Companies (General) Regulations, 2015
37
Ibid
38
<https://scriberegistrars.com/duties-of-directors-companies-act2015/>
39
Ibid
information about the operations and financials of the company. However, a Director has a duty to
ensure that such information is not, directly, or indirectly divulged. A Director must not disclose or
make use of that confidential information for any purpose other than for the benefit of the company. 40
The directors of a company also have additional duties under section 407 of the Insolvency Act41
which provides that: -
(1) The directors of the company shall—
(a) prepare a statement setting out the financial position of the company that complies
with subsection (3);
(b) lay that statement before the creditors' meeting under section 406; and
(c) appoint one of their number to preside at that meeting.
(2) It is the duty of the appointed director to attend the meeting and preside over it…
(4) If the directors, without reasonable excuse, fail to comply with subsection (1)(a), (b) or (c),
each of them commits an offence and on conviction is liable to a fine not exceeding five
hundred thousand shillings.
(5) A director who, without reasonable excuse, fails to comply with a duty imposed by
subsection (2) commits an offence and on conviction is liable to a fine not exceeding two
hundred thousand shillings.
An additional duty of the directors of a company is set out in section 656 of the Insolvency Act42
which provides that: -
When a moratorium takes effect in respect of a company, the directors of the company shall
immediately give notice of that fact to the monitor.
(2) If subsection (1) is not complied with, each of the directors who is in default
commits an offence and on conviction is liable to a fine not exceeding five hundred
thousand shillings.
(3) If, after being convicted of an offence under subsection (2), the directors continue to
fail to given the required notice to the monitor, each of the directors who is in default
commits a further offence on each day on which the failure continues and on conviction
is liable to a fine not exceeding fifty thousand shillings for each such offence.
Section 657(9) of the Insolvency Act goes ahead to articulate that: - If the Court gives approval for a
transfer or disposal under subsection (2) or (3), the directors shall, within fourteen days after
approval is given, lodge with the Registrar for registration a copy of the order giving approval.

40
<https://www.indiafilings.com/learn/duties-of-director-of-a-company/>
41
The Insolvency Act, 2015
42
Ibid
Under the old Companies Act (Cap 486),43 directors also have a duty to disclose their age to the
company which is stipulated under section 187 of the Act. Part I of the Act,44 section 15 also requires
directors to make calls on shares for a public company that is limited by shares; they also required to
transfer shares to the transferee under section 22 of Part I of the Act.45 Section 95 Part I of the Act46
also gives the directors the power to appoint a director.
DISQUALIFICATION OF DIRECTORS
If the directors of a company do not carry out their duties, the law sets out procedures for them to be
removed/disqualified; these are provided for under Part 10 of the Companies Act.47 Section 214(4) of
the Companies Act48 states that a disqualification of a director may be made on grounds that are or
include criminal matters regardless of whether the person being disqualified is the one being subjected
to such proceedings. Section 215 of the Companies Act49 stipulates that a director can be disqualified
on grounds of conviction for an offence. Section 216 of the Companies Act50 provides for
disqualification on grounds of fraud or breach of duty committed while company in liquidation or
under administration; the director can be disqualified for a period of fifteen years. A director can also
be disqualified on grounds of conviction for an offence involving failure to lodge returns or other
documents with Registrar for a maximum period of five years according to section 217 of the
Companies Act.51 Section 218 of the Companies Act52 vests in the court a duty to disqualify unfit
directors and secretaries of insolvent companies; they can be disqualified for a maximum period of
fifteen years and a minimum period of two years. Under sections 219 & 221 of the Companies Act,53
the Attorney General can also disqualify a director on account of public interest after investigating the
company and following the provisions of section 218; any officer or former officer who fails to
provide information about the erring director or secretary of the company to the office of the Attorney
General is liable to a fine not exceeding two hundred thousand shillings. A director or secretary of a
company who directly or indirectly participates in its promotion, formation or management, while an
undischarged bankrupt commits an offence and is liable if convicted to a fine not exceeding five
hundred thousand shillings or to imprisonment for a term not exceeding two years, or to both as

43
The Companies Act, (Cap 486)
44
Ibid
45
Ibid
46
Ibid
47
The Companies Act, 2015
48
Ibid
49
Ibid
50
Ibid
51
Ibid
52
Ibid
53
Ibid
provided for by section 223 of the Companies Act.54 Under section 228 of the Companies Act,55 a
person who contravenes a disqualification order or undertaking commits an offence is liable if
convicted to fine not exceeding one million shillings or to imprisonment for a term not exceeding five
years, or to both. However, under section 229, a disqualified person may apply to the Court for
permission to act in way that would otherwise breach disqualification. Disqualified persons must lodge
a statement/notice with the registrar of Companies under section 230 and the statement must be made
public under section 231 (subject to limitations). Failure to comply with the requirement to a lodge a
notice with the registrar under section 230 amounts to an offence and any person convicted is liable to
a fine not exceeding five hundred thousand shillings or to imprisonment for a term not exceeding two
years, or to both as stated by section 232 of the Companies Act.56
ENFORCEMENT MECHANISMS FOR THE DIRECTOR’S DUTIES
To ensure compliance with their duties (directors), enforcement mechanisms are set out in the relevant
statutory law and common law. Directors can be held liable for their actions with regards to
conducting company business, this is stipulated under Division 9 section 194 of the Companies Act.
Under this provision, any exemption of directors from liability due to their negligence, default, breach
of duty or breach of trust in relation to the company is void. 57 Section 196 of the Companies Act58
states that directors responsible for third party indemnity in cases where they are paying a fine imposed
on them in criminal proceedings, an amount payable to a regulatory authority as a penalty in respect of
non-compliance with a requirement of a regulatory nature, in defending criminal proceedings in which
the director is convicted, and in defending civil proceedings brought by the company, or an associated
company, in which judgment is given against the director. According to the Companies Act 59 section
146 (12): - A director who contravenes this section commits an offence and is liable on conviction
to disqualification for a period not exceeding five years. Similarly, section 147(5)60 states that, “A
person who contravenes subsection (1) commits an offence and is liable on conviction to a fine
not exceeding one million shillings,” all these stipulations under the law act as enforcement
mechanisms to help deter directors from misconduct when conducting their work. Section 421 (3) of
the Insolvency Act 61
states that: - If the directors of the company, without reasonable excuse, fail to
comply with subsection (1), each of them who is in default commits an offence and on conviction is

54
Ibid
55
Ibid
56
Ibid
57
Ibid
58
Ibid
59
Ibid
60
Ibid
61
The Insolvency Act, 2015
liable to a fine not exceeding five hundred thousand shillings. Section 657 (10&11) of the Insolvency
Act62 stipulate that: -
(10) If the directors fail to comply with subsection (9), each of them who is in default commits
an offence and on conviction is liable to a fine not exceeding two hundred thousand shillings.
(11) If, after any of the directors has been convicted of an offence under subsection (10), the
directors continue to fail to lodge the required copy with the Registrar for registration, each of
the directors who is in default commits a further offence on each day on which the failure
continues and on conviction is liable to a fine not exceeding twenty thousand shillings for each
such offence.
Section 658 (5&6) go ahead to further reiterate that: -
(5) If the directors fail to comply with a request made by the monitor under subsection (2),
each of the directors who is in default commits an offence and on conviction is liable to a fine
not exceeding five hundred thousand shillings.
(6) If, after a director has been convicted of an offence under subsection(5), the directors
continue to fail comply with the request or another such request, each of the directors who is in
default commits a further offence on each day on which the failure continues and on conviction
is liable to a fine not exceeding fifty thousand shillings for each such offence.
Section 148 (civil consequences of breach of general duties) of the Companies Act63 further goes
ahead to stipulate that: -
(1) The consequences of breach (or threatened breach) of the general duties of directors set
out in this Division are the same as would apply if the corresponding common law rule or
equitable principle applied.
(2) Those duties (with the exception of the duty set out in section 145) are enforceable
in the same way as any other fiduciary duty owed to a company by its directors.
Section 151(10)64 also provides that, “A director who contravenes this section commits an offence
and is liable on conviction to a fine not exceeding one million shillings.”
In common law however, as the company is a distinct entity from the members and since directors
owed their duties to the company and not to individual shareholders, in the event of breach of those
duties any action for remedies should be brought by the company itself and not by any individual
shareholder. The company alone is the proper Plaintiff, is generally referred to as the rule in Foss v
Harbottle.65 In this case the Directors who were also the company’s promoters sold the company’s
62
Ibid
63
The Companies Act, 2015
64
The Companies Act, 2015
65
Foss V. Harbottle (1843) 2 Hare 461
property at an undisclosed profit. Two shareholders brought action against them alleging that in so
doing, that the directors had breached their duties to the company. It was held that if there was any
breach of duty, it was a breach of duty owed to the company and therefore the Plaintiffs had no locus
standi for the company was the proper plaintiff.66
However, there are four exceptions to this rule in which an individual member may bring action
against the directors namely: -
(a) Where it is complained that the company through the directors is acting or
proposing to act ultra vires.
(b) Where the act complained of even though not ultra vires, the company can
effectively be done by a special resolution.
(c) Where it is alleged that the personal rights of the Plaintiff have been infringed
and/or are about to be infringed.
(d) Where those who control the company are perpetuating the fraud on the minority.67

CONCLUSION
The Companies Act 2015, the old Companies Act Cap (486), the Insolvency Act 2015, the Companies
(General) Regulations 2015 and common law set out the duties of the directors of company which help
fetter their powers and protect the investors’ interests. The companies Act 2015 however, goes ahead
to stipulate some enforcement mechanisms (also putting into account the rules of common law and
equitable principles) to ensure compliance with their (directors) duties.

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Aberdeen Railway v. Blaikie (1854) 1 Macc. 461
Foss V. Harbottle (1843) 2 Hare 461
Percival v Wright (1902) 2 Ch. 421
Punt v. Symons (1903) 2 Ch. 506
Re Brazilian Rubber & Plantations Estates Ltd. (1911) 1 Ch. 405
Re City Equitable Fire Insurance Co. (1925) Ch. D 447
The Companies (General) Regulations 2015
The Companies Act (Cap 486)
The Companies Act, 2015
The Insolvency Act, 2015