Directors will now pay Sh20 million fine or go to jail for neglecting duty

Having a company director’s badge will not be ceremonial any more thanks to the new Companies Act, 2015.

The new law virtually gets rid of paper directors who have been notorious for passing the buck whenever things go wrong.

The law which is set to become operational once the Cabinet Secretary (CS) publishes it in a gazette notice has heaped on directors heavier duties and responsibilities.

It spells out harsh penalties for directors who do not respond to call of duty as required by the Act. Offending directors face a jail term of 10 years or fines amounting to Sh20 million.

“The aim of the new Act is to promote transparency in reporting, strengthen the quality of financial reporting as well as corporate governance,” said George Osina, an auditor at Deloitte during a seminar where the Act was simplified for members of the Kenya Association of Manufacturers (KAM).

Coulsen Harney Advocates also helped with the breakdown of the new law.

This comes at a time when gaps in corporate governance among some commercial banks have been exposed with Dubai Bank and Imperial Bank being placed under statutory management.

Oversight roles

Winnie Jumba, an associate director at Deloitte, stated that the Act has outlined the offences and liabilities that accrue with failure to do certain things. “That clearly shows that there is a relationship between the roles and failure to actually comply with them by the directors,” she said.

“Many of the directors have been paper directors whereby they are recognised as directors but do not offer oversight to the company, with the responsibility therefore being left to the management of the company,” she said.

Ms Jumba noted that the current Act does not have proper structures on directors’ responsibility. However, in the new law it very clear what you are signing for, she said.

“And if you fail to live up to that duty then there is a process in the law to come after you,” she said, adding that company secretaries are also culpable.

Some of the director’s oversight roles in the old Companies Act include monitoring, overseeing strategy and vision of the company.

“It is not making decisions mechanically as directors have done without proper information being given to them by management,” added Dalphine Kemunto, a legal manager at Deloitte who explained that making decisions without a proper briefing from management will be construed as giving false information, which is punishable under the new law.

Kemunto said directors were required to make certain disclosures. Should they fail to make those disclosures which include conflict of interest and the interest that they have either on the company assets or whatever they are selling to the company over certain thresholds, then they risk being fined or jailed.

Directors are also supposed to make certain filings with the Registrar of Companies, failure to which they or company secretary will be held responsible.

Perhaps the most punitive penalty that can be meted on directors is on the offence of trading with the intent to defraud the market. This will attract a fine of Sh20 million or a jail term of ten years. Abuse of  the Insolvency Act also has consequences.

“In the insolvency Act as well, the directors can be held personally liable for the debts that they incurred while trading knowing that the company was insolvent,” said Harveen Gadhoke, a partner at Deloitte and head of financial advisory.

Failure to keep proper books of account will attract a fine not exceeding Sh2 million for a body corporate and Sh1 million for an individual. This director can serve up to two years in jail or be fined  for this offence. Similar fines and/or jail terms will befall directors who do not keep records for seven years.

Approval of financial statements that do not comply with requirements of the Act will attract a fine of up to Sh1 million.

Failure to prepare a statement for a financial year will attract a fine of up to Sh1 million and accrues an additional fine of Sh200,000.

If directors approve misleading financial statements of a company or a group of companies then the fine is up to Sh500,000 per director. “And that is where the audit report will become very important now,” said Mr Osina. In the new Act, directors are supposed to make representation on audit reports, confirming that the information they have supplied is accurate.

“Because what has been happening is that directors sometimes consider themselves to be strangers to the company. When something happens they put the blame on auditors,” he added.

If directors prepare financial statements that are not in compliance with applicable accounting standards they will each be slapped with a fine of Sh500,000.

Directors also have to ensure that all entries within the financial books apply similar accounting policies. Failure to which will attract a fine of at least Sh500,000 per director.

Presenting a director’s report

Directors are also required to disclose the number of employees in their statements or risk being fined Sh500,000 per director.

Presenting a director’s report that does not disclose the names of the directors and dividends attracts a fine of Sh500,000.

There are issues though. “We don’t know who will be monitoring all these or whether it will be Registrar of Companies,” said Osina. He however hoped that the CS will come up regulations to clarify this as the law allows him or her to do so.

Moreover, the Act is not specific on whether or not the law will be applied in retrospect. Should the law be applied in retrospect, then soon Kenyans will start seeing some heads roll, particularly in the banking sector where it has been reported that a commercial bank went on trading knowing very well that it was insolvent.