Directors are responsible for making decisions concerning the management of a company. In Kenya directors have statutory duties under the Companies Act, 2015. Some of these statutory duties are;
- Duty to act within their powers (Sect. 142)
- Duty to promote the success of the company ( Sect. 143)
- Duty to exercise independent judgement ( Sect. 144)
- Duty to exercise reasonable care skill and judgement ( Sect. 145)
- Duty to avoid conflict of interest ( Sect. 146)
- Duty not to accept benefits from third parties ( Sect. 147)
A director is usually appointed in line with the provisions of the Companies Act. The Company is also expected to keep a register of all its directors. Consequently, a director is removed from office is line with the provisions of the Companies Act, 2015. Section 2 of the Employment Act defines an employee as a person employed for wages or salary and it includes an apprentice or an indentured learner. Employees usually entered into a contract of service for the payment of wages. Consequently, a director is presumed not to be an employee of a company in the absence of a contract of service.
As an office holder, a director is not automatically considered as an employee of the company. However, a director can still enter into a contract of service with the company for the provision of certain services. A director service contract generally outlines the terms of engagement. Consequently, it is possible to be both an employee and a director of a company.
The UK Court of Appeal in Robert Stack v Ajar Tec- Limited in [2015] EWCA Civ 46, CA held that an director and shareholder of a company was considered to be an employee of a company. In this particular case, the Appellant had not formalized the employment relationship with the company, however, there had been an express agreement between the Appellant and the company that he would provide services. The Appellant had worked for the company for a period of three years without receiving any payments for his services. The company eventually terminated his directorship following a disagreement between the shareholders. The court held that the Appellant and the Respondent had operated as though a contract of service was in place. The Court held that the Appellant was entitled to be paid for start up work.
The Court of Appeal in Rift Valley Water Services Board & 3 Others v Geoffrey Asanyo & 2 Others Civil Appeal 60 of 2015 Consolidated with Civil Appeal No. 61 of 2015, held that,
“We hasten to draw a clear distinction between an employee and a member of a board of directors of a corporate entity, such as the 1st appellant. That distinction lies in our answer to the question as to whether directors are employees of the company to whose board they are appointed. They are not. In McMillan v Guest [1942] AC p.561, it was held that a company director is an office-holder who is not, without more, an employee of the company. That is the position here. In the absence of a contract of service in terms of which a director is engaged as a full-time employee of a company, it cannot be presumed that such a director is an employee of the company (see Parsons v Albert J. Parsons and Sons Ltd [1979] ICR p.271).”
In a nutshell, in the absence of a contract of service a director would not be considered to be an employee of the company. Directors who do not meet their statutory obligations risk being fined, prosecuted, and held liable for the debts of the company or being disqualified from holding the office of directorship. The termination of a director’s contract of service does not automatically vacate his position as an office holder in the company.
This article is free of charge for information purposes only. It does not constitute legal advice and it should be not relied on as such. WNK Advocates LLP takes no responsibility for the accuracy and /or correctness of the information and commentary as set out in the article. If you have any query regarding the same, please contact us at legal@wnkadvocates.com
