‘Guilty’ directors go free with mere fines

After the failures in Corporate America, particularly the giant Enron which reduced thousands of investors to paupers and threw thousands of employees out of employment, the US passed the Sarbanes Oxley Act (SOX) which introduced among other provisions, onerous duties and heavy penalties on company directors. It was said that some were even reluctant to accept directorships in American corporates. This Act was enacted in 2002.

The UK after nearly eight years of consultations passed into law the UK Companies Act 2006 consisting about 1300 sections, the largest ever. This Act for the first time codified the duties of corporate directors.

Besides the new UK Companies Act, a Revised Combined Code for Good Corporate Governance will be applied to the UK Listing Rules. Although the listing rules of Sri Lanka’s SEC has taken steps to safeguard investors and shareholders, I feel that those directors found guilty of insider dealings and other misdemeanors and allowed to go scot-free it they pay the SEC a fine imposed on them by the SEC is not in the spirit of the rules and may even be construed as bribery and corruption. The shareholders and investors have a right to know about these misdemeanors because they may not reappoint such guilty directors to their boards.
In view of a serious dispute brewing in a large corporate conglomerate that has been widely publicized in the newspapers, I feel it opportune to remind those involved in good corporate governance the following legal and company secretarial practice aspects.

A company when registered with the Registrar of Companies acquires the status of a distinct legal entity with all the rights available to a human being. It can own property and have a banking account in its own name and the company’s money and property belong to the company and not to the shareholders or the directors.

The only difference between a company and a human being is that the incorporated company has perpetual succession i.e. it does not die except when liquidated.

A company can only function through human beings and the company appoints as directors a few persons to carry out the business for which it was incorporated, which objects are laid down in the Memorandum of Association. In carrying out these objects, the directors are governed by the Rules and Regulations as stipulated in the Articles of Association of the company. There are also other regulations such as the Company Law that must be complied with. Most of these laws are designed to ensure that the company’s affairs are conducted in the best interest of the company, its shareholders, investors and creditors.

The directors are officers and employees of the company. There are a whole lot of other rules a company must comply with for example the issue of capital, the contents in a prospectus, transfer of shares, forfeiture of shares, etc -- too numerous to outline here.

The chairman unless named in the Articles of Association shall be appointed by the directors at a duly constituted board meeting.

The quorum fixed by the Articles must be present to make the proceedings of the board valid. The duties of the chairman according to text books are to conduct the affairs of the meeting impartially to ascertain the consensus of the meeting and decide questions arising for decision during the meeting. “Directors except private companies which are not subsidiaries of public companies must retire on reaching the age of seventy, but they may be re-elected by a resolution passed at a general meeting of which special notice is given stating their age”. This provision is obviously because faculties deteriorate as one grows old and may not be able to contribute as they did when they were young.

What the Company Law envisages is to protect the company’s assets and even if a director holds 90% of the shares of the company, he is debarred from disposing of the company property without proper authority and any unauthorized disposal of assets are ultra vires and void.