Directors' Duties Under the Kenyan Companies Act: What Boards Get Wrong

Before 2015 a Kenyan director's duties were scattered across case law and treated by many boards as broadly aspirational. The Companies Act 2015 changed that by codifying them in statute, and the practical consequence is that a director can now be shown a section and asked which part of it they complied with.

This article covers what the seven duties actually require, where boards most often fall short, and what personal exposure follows.

The seven codified duties

Act within powers

A director must act in accordance with the company's constitution and exercise powers only for the purposes for which they were conferred. Issuing shares to dilute a troublesome minority, rather than to raise capital, is the classic breach: the power exists, but it was used for an improper purpose.

Promote the success of the company

The central duty. A director must act in the way they consider, in good faith, would most likely promote the success of the company for the benefit of its members as a whole — having regard to the long term, the interests of employees, relationships with suppliers and customers, the impact on the community and environment, and the desirability of maintaining a reputation for high standards.

Two points matter here. The test is subjective as to what the director considered, but the absence of any evidence of consideration makes the claim difficult to sustain. And the duty is owed to the company, not to any individual shareholder — a director appointed by an investor still owes the duty to the company.

Exercise independent judgement

A director must not simply act on the instructions of whoever appointed them. Nominee directors are lawful; nominee directors who vote as instructed without applying their own mind are in breach. This is a recurring difficulty on boards with investor-appointed directors and it is not resolved by everyone agreeing to ignore it.

Exercise reasonable care, skill and diligence

Measured on a dual standard: the care a reasonably diligent person with the general knowledge and experience reasonably expected of someone in that role would exercise, and — where the director actually has greater knowledge or experience — that higher standard. A qualified accountant on a board is held to more on financial matters than a lay director.

Avoid conflicts of interest

A director must avoid situations in which they have, or can have, a direct or indirect interest conflicting with the company's interests. This covers the exploitation of property, information or opportunity, and it applies whether or not the company could itself have taken advantage of the opportunity.

The corporate opportunity rule catches directors who take a contract personally that came to them through the company. The defence is prior authorisation by disinterested directors or the members, obtained before rather than after.

Not accept benefits from third parties

A director must not accept a benefit conferred by reason of being a director or of doing anything as a director. This sits alongside Kenya's anti-bribery framework and, for companies with US or UK connections, alongside the FCPA and the Bribery Act.

Declare interest in a proposed transaction

Where a director is in any way interested in a proposed transaction with the company, the nature and extent of that interest must be declared to the other directors before the transaction is entered into. Failure to declare is an offence, separate from any question about whether the transaction was fair.

Where boards actually fall short

No minutes, or minutes written afterwards. The duty to promote the company's success requires the director to have considered the relevant factors. Where the board keeps no record of what was discussed, there is nothing to point to. Contemporaneous minutes are the evidence; a reconstruction after a dispute is worth little.

Related party transactions handled informally. Payments to a director's other company, leases of a director's property, loans between group entities. Each requires declaration and, depending on value and the articles, member approval. These are the first items an investor's diligence examines.

Directors who do not attend. A director who does not attend meetings and does not read papers is not thereby insulated. The duty of care is a duty to be informed, and passivity has been treated as a breach rather than a defence.

Confusion between the shareholder and director roles. In owner-managed companies the same people occupy both, and decisions get taken without distinguishing which hat is being worn. When the company later has outside shareholders or creditors, that history is examined.

What happens when the company is in difficulty?

This is where personal exposure becomes real.

As a company approaches insolvency, the directors' duty shifts toward the interests of creditors. Under the Insolvency Act 2015, a director who knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation, and who did not take every step to minimise loss to creditors, can be ordered to contribute personally to the company's assets.

Fraudulent trading — carrying on business with intent to defraud creditors — carries both personal liability and criminal exposure.

The practical guidance is unwelcome but simple: when the company is in difficulty, take advice early, document the reasoning for continuing to trade, monitor the position formally, and stop trading when the reasonable prospect disappears. Directors who trade on hoping for a recovery are the ones who end up personally liable. Our corporate law team advises boards at this point, and the earlier the conversation happens the more options remain.

What are directors' obligations to shareholders?

Duties are owed to the company, but shareholders have their own remedies where the company's affairs are being conducted improperly, and directors should understand what those look like.

Unfair prejudice. A member may petition the court where the company's affairs are being conducted in a manner unfairly prejudicial to members generally or to some part of them. Typical grounds include exclusion from management in a quasi-partnership company, diversion of business opportunities, excessive director remuneration, and improper dilution. Remedies are wide, including an order that the majority buy out the petitioner's shares at a valuation.

Derivative claims. Where a wrong is done to the company and the wrongdoers control the board, a member may apply for permission to bring a claim in the company's name. The court controls the gateway, but the availability of the mechanism changes the calculation for a board considering a self-interested transaction.

Information rights. Members are entitled to the annual financial statements and to inspect certain registers. Boards that treat information requests as hostile generally escalate a manageable disagreement into a petition.

Board practice that actually protects directors

Six habits, none of them onerous, that together constitute the evidence a court will look for.

Agendas and papers circulated in advance. A decision taken on papers seen for the first time in the room is difficult to characterise as informed.

Minutes recording reasoning, not only resolutions. "The board considered the effect on employees and the long-term consequences and resolved..." is evidence of compliance with the duty to promote success. "It was resolved..." is not.

A standing interests declaration item. Placing it at the top of every agenda makes declaration routine rather than an admission.

Dissent recorded. A director who disagrees should have that recorded. It is the only reliable way to distinguish their position later.

Independent advice on significant transactions. On related party transactions in particular, advice from someone not conflicted is what demonstrates the process was genuine.

An annual review of the register of interests, updated as circumstances change rather than reconstructed when someone asks.

Disqualification

The court may disqualify a person from acting as a director for unfitness, persistent breach of filing obligations, fraud in relation to the company, or conviction of certain offences. Disqualification periods run to fifteen years, and acting while disqualified is an offence carrying personal liability for debts incurred during the period.

Can directors be protected?

Partly, and the limits matter.

A company may not exempt a director from liability for negligence, default, breach of duty or breach of trust in relation to the company. Provisions purporting to do so are void.

A company may, however, indemnify a director against liability to third parties, subject to statutory limits, and may purchase directors' and officers' liability insurance. For any board carrying meaningful risk, D&O cover is not a luxury.

The most effective protection remains procedural: proper minutes, timely declarations of interest, informed decisions, and independent advice on significant transactions. Our regulatory compliance practice builds these into board processes for companies where the exposure justifies it.

What a board should do now

Confirm every director understands the seven duties as statutory obligations rather than guidance. Keep contemporaneous minutes that record the factors considered, not only the resolutions passed. Maintain a register of directors' interests and update it. Handle related party transactions formally. Monitor solvency and take advice early if it deteriorates. And review D&O cover against the company's actual risk profile.

None of this is onerous for a functioning board. All of it is what the court will look for if the company fails.