LEGAL VIEWPOINT: Questioning Directors of Companies & Responsibilities

By Dr AbdelGadir Warsama, Legal Counsel

Legally speaking the positions of chairmanship & membership of the board of directors of public joint stock companies has got their burdens and liabilities. The appointees may rejoice in such appointments and big titles for social purposes. But, as a matter of law and fact, they are sitting on hot chairs, “if we can say this”. In other words, the more power you have, the more liabilities you have to shoulder.

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The provisions of the Commercial Companies law in Bahrain, as we can see, give clear picture about the (heat) of such responsibilities. The mentioned instances give us some examples, including that, the chairman and all members of the board of directors shall be liable towards the company, the shareholders and third parties for all acts of fraud, abuse of authority, violation of the law or the Articles of Association issued by the company, and they shall also be liable for mismanagement due to all acts of negligence.

This clearly shows that everyone has the right to take legal action, on the occurrence of any of the above instances, against the chairman and all members of the board of directors. Moreover, they are exposed to legal proceedings from within or without the company. This indicates that the chairman and other Directors should perform their duties with utmost care and diligence and high standards of professionalism, failing which the company (as an institution) or any one of the shareholders or other third party may take legal proceedings against them jointly or separately. Many shareholders are not aware of this legal right nor interested to know, could be due to their ignorance, or carelessness or lack of interest…

The chairman and other directors are jointly liable if the fault or negligent mistake occurs as a result of a resolution or resolutions adopted unanimously. However, if the resolution has been adopted by majority only, the dissenting directors shall not be held liable provided that they have recorded their objections in the minutes of the particular meeting.

This shows the importance of reporting all necessary details in the minutes record. Directors who have dissenting opinions shall insist on entering and recording their dissenting views in the minutes, otherwise they share the responsibility with other directors regarding the outcome of that specific Resolution.

Moreover, it is important to mention here, that the mere absence of a director, during the meeting wherein that specific resolution has been adopted will not absolve that director from the liability unless he has proved that he was not aware of the Resolution or that he was aware of it but was unable to show or explain his objection for any reason whatsoever. This shows that the legal burden regarding Resolutions of the board is following the director even during his absence at the time of that particular resolution.

This is, we believe, is very important because the intention of the legislature is to close the door for some directors who may prefer an “alibi” when they know that certain issues will be discussed and they don’t want to involve themselves. A director should have a say in all issues raised because he is responsible in all cases and mere absence will not bar him from the liability. The general assembly of the shareholders shall specify who should take the legal proceedings, if any, on behalf of the company versus the chairman and other directors.

In case the company is in liquidation, the liquidator shall assume the powers of the shareholders and initiate the legal proceedings on behalf of the company. A shareholder, by himself may initiate such proceedings if he thinks the company has failed to do so but he should prove the occurrence of particular damage to him, and such shareholder should take all necessary steps to notify the competent management of the company of his intention to initiate the legal proceedings.

An additional burden or misgiving (if any) relates to the fact that neither the chairman nor members of the board of directors shall do or start any work / business that may cause any sort of competition to the company. The conflict-of-interest rule shall be observed very carefully. This is to deprive occurrence of all instances of malpractices, opportunism and importation. All brains and hands of all directors shall work towards one ultimate goal and direction, which is the interest of the company and all shareholders.

This attitude and goal shall always prevail over personal interests of the persons elected to serve the company. However, the general assembly of the shareholders may, in certain genuine circumstances, exempt a director from such limitation under certain conditions provided, however that this exemption shall not hamper or affect the interests of other shareholders. Based on the above the Chairman and Directors of each company shall perform their responsibilities with utmost care and good faith, otherwise they could face some legal proceedings from the company or the shareholders or any other interested third party. This is a big responsibility and requires a big mind and heart all through the post.