The board of directors of a Cyprus company is the administrative body responsible for the day to day management of the company.
According to section 170 of the Cyprus Companies Law, Cap. 113, it is mandatory for a private company limited by shares to have at least one director on the board of directors while public companies must have at least two directors. In the case of private companies with a single member, the sole director may also be the secretary of the company (section 171 (1) of the Cyprus Companies Law, Cap. 113).
The provisions of the Cyprus Companies Law, Cap. 113 do not explicitly fix the maximum number of directors to be appointed on the board of directors of a Cyprus company, however, this restriction is imposed in the articles of association of each Cyprus company.
Who may be appointed as director?
Any natural person or legal entity qualifies to be appointed as director of a Cyprus company.
The Cyprus Companies Law, Cap. 113 does not make explicit provisions of any formal requirements for the appointment of a person or legal entity in the position of director.
Furthermore, the director of a Cyprus company need not be a shareholder of the company.
Appointment and Removal of directors
The first directors of a Cyprus company are appointed by the subscribers of the company and from there on, the procedure to be followed for the appointment and/or removal of subsequent directors is governed by the company’s articles of association.
Subject to the articles of association of the company, the appointment of a director will arise in instances such as to fill a casual vacancy, i.e. when a director has retired or when it is necessary to appoint an additional director.
The company may by ordinary resolution remove a director from office, prior to the expiration of his period of office, by adopting an ordinary resolution in general meeting, notwithstanding, anything contained in the articles of association of the company or any agreement between the director and the company.
An alternate director is a director appointed in the place of an existing director in instances when the latter is not able to be present at a board meeting. In such instances, provided that the articles of association of the company make such provision, an alternate director may be appointed in his place following the approval of his appointment by the board of directors. The Cyprus Companies Law, Cap. 113 does not confer the right of appointment of an alternate director, therefore, such right must be contained in the articles of association of the company.
The alternate director assumes all functions of the director who has appointed him including the right to receive notice, attend, speak and vote at all board of directors’ meetings of the company. An alternate director is regarded as an officer of the company and not as an agent of the director who has appointed him and in this respect, will be held responsible for his acts or omissions to act towards the company.
Meetings of the board of directors
If the powers of the board of directors have not been delegated, the directors meet together for the dispatch of the business of the company. The articles of association of the company regulate the period of the notice required for convening the meeting, they fix the quorum and they stipulate the votes necessary for a decision to be passed.
Meetings of the board of directors can be held in Cyprus or abroad and it is possible to participate in a meeting of the board of directors by electronic means i.e. by telephone or by any other means where an individual participating can simultaneously hear and be heard by the other participants. Participation by electronic means of an individual shall be counted for the purpose of ascertaining a quorum.
Once again, the powers conferred on the board of directors of the company are set out in the articles of association of the company.
The board of directors is the administrative body of the company that has been delegated with extensive powers to run the company’s operations. Nevertheless, such powers are restricted by law and in particular by the provisions of Cyprus Companies Law, Cap. 113 which provide for instances where the general meeting of the company is allocated exclusive powers as to the management and operation of the company such as for the adoption of a special resolution for amending the articles of association of the company, for the reduction or increase of the authorized share capital of the company or the voluntary liquidation of the company etc. Further, the powers of the directors can be restricted by the articles of association of the company.
The duties of the Cyprus directors arise under both common law and by statute and these fall within the following categories:
(i) Fiduciary duties;
(ii) Statutory duties; and
(iii) Duty to exercise skill and care
1. Fiduciary Duties
The underlying principles of a fiduciary are that of loyalty and faithfulness. Thus, the directors owe a duty to the company to act bona fide for the general advantage of the company, meaning that they must exercise their powers honestly and in the best interest of the company and the shareholders both present and future. Furthermore, the directors must not put themselves in a position where their duties and personal interests are likely to conflict. The directors must not make a secret profit out of their position and must act in accordance with the company’s articles of association and their powers to be exercised within the parameters of the law. A director is under a continuous obligation to adequately execute his functions as director in good faith in order to meet the objectives of the company.
2. Statutory Duties
Such duties are imposed mainly by the Cyprus Companies Law, Cap. 113 as well as by legislation of the Income Tax, VAT Customs & Excise etc.
Some of the duties imposed by the Cyprus Companies Law, Cap. 113 are the following:
(a) Section 141, keeping of accounting books and records for the preparation of financial statements disclosing the assets and liabilities of the company, sales and purchases and any other transactions conducted by the company as well as amounts paid and received which shall be available for inspection.
(b) Section 142, preparation of financial statements (or consolidated financial statements if applicable) which shall be presented within 18 months from the incorporation of the company and thereafter, every calendar year;
(c) Section 151, preparation and submission to the Registrar of Cyprus Companies of the directors’ report (annual return) along with the approved and signed financial statements of the preceding year which shall present the status of the company in terms of shareholding, share capital, directorship etc for each year;
(d) Section 185, disclosure of payment of loss of office made in connection with transfer of shares in a company;
(e) Section 187, maintenance of a register reflecting directors’ shares held in the company or the company’s subsidiary or its holding company or subsidiary of the holding company or any debentures issued in favour of the director in any of the above;
(f) Section 191, obligation to disclose their direct or indirect interest in contracts with the company at the meeting of the board of directors;
(g) Section 192, maintenance of a register of directors and secretary at the registered office of the company.
3. Duty of care and skill
Generally, this duty embraces the concept of “a reasonably diligent person” as introduced by common law, according to which the directors must exercise the degree of skill, diligence, knowledge and experience which may reasonably be expected from persons carrying out the same functions and having the same knowledge and experience as the director in question.
If a director acts in the best interest and honestly towards the company, he cannot be held liable for damages.
However, the level of skill, diligence, knowledge and experience has not been clearly defined and therefore, it is difficult to explain the exact meaning of that definition and its application in practice.
According to common law, the standard of care, skill and diligence is commonly known as the “objective” or “benchmark” test of what “the reasonable man” might expect of a director in the particular circumstances. If that director has a particular skill or level of expertise then, he is required to exercise that skill in addition to the “benchmark” test.
Depending on the duty breached by a director the liability will vary. If there is a breach of the duty to act in good faith or with all due skill and care as may be reasonably expected, will give rise to claims for damages and the director will be held personally liable to the company.
In cases where there is a breach of a duty imposed by statute, the liability will be criminal, civil or administrative.
Further, directors may be found liable with respect to d issues by the Inland Revenue or Customs & Excise. Directors who are involved in tax related offences may be prosecuted.