Directors in Kenya Have Fiduciary Duties. Most of Them Don’t Know What That Means Until a Creditor’s Lawyer Explains It in Court.

Picture this. It is a Tuesday morning in Nairobi. A director — let us call him David — is sitting in his office on Upperhill when his phone rings. It is his company’s general manager, voice tight: “There is a lawyer here with a court summons. He says we have been sued by the supplier.”

David is not worried. The supplier is owed some money, yes, but the company owes the money, not David personally. The company is a separate legal entity. That is the whole point of incorporation, is it not? Limited liability. His shares are his exposure. His personal bank account, his house in Karen, his car — those are not on the table.

He picks up his own phone and calls his lawyer.

Thirty minutes later, his lawyer calls back. The tone is different.

“David, I have read the pleadings. The supplier has named you personally as a second defendant. They are relying on a personal guarantee you signed eighteen months ago. And there are some board decisions here that may give them additional arguments. We need to talk.”

David had always thought he understood how companies work. He is about to discover that the law has a much more detailed view of what a director owes, to whom, and when that protection runs out.

What Directors Think the Law Says

The concept of limited liability is genuinely one of the great innovations of commercial law. When the legislature created the incorporated company, it deliberately separated the legal identity of the company from the natural persons who own and run it. A company can sue and be sued in its own name. It can own property. It can enter contracts. Its debts are its own.

This separation — the so-called corporate veil — is why entrepreneurs take risks. If you invest in a business and it fails, you lose your investment. You do not ordinarily lose your house.

Most directors understand this in broad strokes. What they often miss are the exceptions, the qualifications, and the personal duties that run alongside the corporate structure from the moment they are appointed.

The law does not say: “You are a director, therefore you are protected from everything.” What it says is much more conditional: “The company’s debts are not your debts, unless you have done something that makes them yours.”

That “unless” is where most directors are completely in the dark.

What Fiduciary Duties Really Are

A director is a fiduciary. That is not just a legal label. It describes a relationship that equity protects with particular rigour: a relationship of trust and confidence in which one person holds power over another’s interests, and is therefore held to a high standard of loyalty and good faith.

When you are appointed a director, you do not merely acquire authority to manage the company. You assume a set of duties that the law imposes on you whether or not your letter of appointment mentions them. The Companies Act, 2015 (No. 17 of 2015) codifies these general duties under Part IX, Division 3 (sections 142 to 149). They include:

Section 142 — Duty to act within powers. A director must act in accordance with the company’s constitution and exercise powers only for the purposes for which they are conferred. If the articles say you need board approval to borrow above a certain limit, borrowing without that approval is a breach. The transaction may be voidable and the director personally accountable for any resulting loss.

Section 143 — Duty to promote the success of the company. A director must act in good faith in the way most likely to promote the success of the company for the benefit of its members as a whole. This includes having regard to the long-term consequences of decisions, the interests of employees, and the company’s relationships with suppliers and customers.

Section 144 — Duty to exercise independent judgement. A director must exercise independent judgment. This does not mean you cannot take professional advice — of course you should. It means you cannot simply adopt the position of a controlling shareholder or fellow director without applying your own mind.

Section 145 — Duty of care, skill and diligence. A director must exercise the care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience expected of someone in that role, and also the specific knowledge and expertise that the particular director actually has. A qualified accountant on a board is held to a higher standard on financial matters than a director with no financial background.

Section 146 — Duty to avoid conflicts of interest. A director must avoid any situation in which they have, or could have, a direct or indirect interest that conflicts or may conflict with the interests of the company.

Section 147 — Duty not to accept benefits from third parties. A director must not accept benefits from third parties that are given by reason of their being a director, or by reason of any act or omission by them as a director, unless the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

Section 151 — Duty to declare interests. A director must declare the nature and extent of any interest in a proposed or existing transaction or arrangement with the company. The declaration must be made to the board, must be specific, and the interested director must ordinarily abstain from voting on the matter.

These duties are not new inventions. They codify what courts of equity have enforced for over a century. What the Companies Act, 2015 does is make them statutory, clearer, and directly enforceable in ways that leave directors with far less room to argue ignorance.

Key Takeaway: The Duties Are Automatic You do not have to sign anything to acquire fiduciary duties. They attach the moment you become a director — whether formally appointed, acting as a de facto director, or operating as a shadow director whose instructions the board follows. The Companies Act, 2015 defines “director” broadly enough to catch all three categories.

Where Personal Liability Can Arise

The corporate veil is not a magic shield. There are specific, well-defined circumstances in which a director’s personal exposure becomes real. Understanding them is not a counsel of paranoia — it is the most basic form of risk management.

1. Signing Personal Guarantees

This is the single most common source of personal liability for directors in Kenya, and it is entirely voluntary. When a bank or landlord or supplier requires a personal guarantee before dealing with the company, and the director signs, that director becomes personally liable for the guaranteed obligation if the company defaults.

David’s situation from the opening is the classic case. The supplier asked for a guarantee. The director signed. The company could not pay. The guarantee was called. The rest is litigation.

Practical Example — The Guarantee Trap A director signs a personal guarantee on a bank loan to help the company through a cash-flow problem. Two years later, the company is struggling and the bank calls the loan. The director assumed the guarantee was a formality. It was not. The bank sues the director personally. The director’s personal savings and property are now potentially at risk.

2. Conflict of Interest and Secret Profits

This is where equity becomes particularly unforgiving. If a director uses their position to make a personal profit that should belong to the company — and does so without proper disclosure and authorisation — they are liable to account for every shilling of that profit to the company. It does not matter whether the company could have made that profit itself. It does not matter that the company was not harmed. The director acted in breach of the duty of loyalty, and equity demands disgorgement.

Consider the common scenario: a director learns through their role that a commercial property adjacent to the company’s premises is about to come to market at a favourable price. Rather than bringing that opportunity to the board, they buy it personally and lease it back to the company at a premium. The profit on the transaction and the unfair lease terms are actionable. The company can claim the profit. In an appropriate case, the lease arrangement can be unwound.

3. Misuse of Company Assets

Company assets are held by directors in a position analogous to trustees. Using company vehicles, premises, employees, funds, or intellectual property for personal benefit without proper authorisation is a breach of fiduciary duty. The consequences range from an obligation to account and restore to full civil liability and, in serious cases, criminal exposure under the Insolvency Act, 2015 for conduct amounting to fraud.

4. Usurping Corporate Opportunities

A director must not divert to themselves or to connected parties a business opportunity that belongs to the company. If your company is in negotiations to acquire a distributorship, and you quietly acquire it through your spouse’s entity, you have breached your duties. The company can seek an account of profits and, in appropriate cases, a constructive trust over the benefit obtained.

5. Reckless Commercial Decisions

The duty of care, skill and diligence under section 145 of the Companies Act, 2015 is not satisfied by good intentions. A director who signs contracts without reading them, approves accounts without understanding them, or delegates all responsibility and never inquires about outcomes, can be found in breach if that inattention causes the company loss. Courts do not second-guess every commercial judgement — but they do not excuse a complete absence of engagement.

Practical Example — The Sleeping Director A non-executive director on the board of a family company attends quarterly meetings but never reads the management accounts. Over two years, the finance manager embezzles company funds. The director signs off on annual accounts certifying their accuracy without reviewing them. On discovery of the fraud, the company’s liquidator considers an action against the director for failure to exercise reasonable skill and diligence. Ignorance is not a defence.

6. Acting While Disqualified

Under section 224 of the Companies Act, 2015, a person who acts as a director while disqualified becomes personally liable for the debts of the company incurred while they were involved in management. Disqualification can arise from court orders, conviction for relevant offences, undischarged bankruptcy, and other prescribed circumstances. Directors who resign but continue to exercise management functions are not protected by the resignation.

Why Insolvency Changes Everything

A solvent company and an insolvent one are governed by different priorities. When a company is financially healthy, directors owe their duties primarily to the company and, through the company, to its shareholders. That is the ordinary position.

But as the company approaches insolvency, the legal landscape shifts. The High Court of Kenya, in In re Ukwala Supermarket Limited [2019] eKLR, affirmed what has long been established in company law: that once a company approaches insolvency, a director’s first duty must be to the creditors. The directors are required to take steps to protect creditors, and if a solution cannot be found, the company may need to enter formal insolvency proceedings.

This shift matters enormously in practice. A director who, knowing the company cannot pay its debts, continues to trade, enters new contracts, takes on new creditors, and dissipates assets, is no longer merely making a bad commercial decision. They may be committing a statutory wrong.

Wrongful Trading — Section 506, Insolvency Act, 2015

Under section 506 of the Insolvency Act, 2015, where a company goes into insolvent liquidation and it is found that a director knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation, the court may order that director to contribute to the company’s assets. The standard is both subjective (what did this director actually know?) and objective (what should a reasonably diligent director in this position have known?).

The critical defence is that the director took every step they ought reasonably to have taken to minimise the potential loss to creditors. Acting on good professional advice, calling an emergency board meeting, seeking restructuring advice, and documenting everything are not just good practice — they are the building blocks of a legal defence.

Fraudulent Trading — Section 505, Insolvency Act, 2015

Fraudulent trading is a more serious wrong. It involves carrying on business with intent to defraud creditors or for any other fraudulent purpose. Unlike wrongful trading, which is founded on negligence, fraudulent trading requires dishonesty. Under section 505, a court can order any person who was knowingly a party to fraudulent trading to contribute to the company’s assets without any limitation. The exposure is unlimited.

Criminal liability under the Insolvency Act, 2015 also arises for fraudulent conduct in connection with a company in liquidation, including concealing property, falsifying documents, and fraudulent removal of assets. Disqualification from acting as a director for up to 15 years is an additional consequence.

Key Takeaway: Insolvency Triggers a Duty Shift The moment a company shows signs of insolvency, director behaviour comes under intense legal scrutiny. Continuing to trade, paying some creditors in preference to others without justification, allowing assets to leave the company, and failing to take professional advice can all become grounds for personal liability. The Insolvency Act, 2015 gives liquidators wide powers to investigate past conduct and bring claims against delinquent directors.

The Mistakes Directors Make

Most directors do not breach their duties through greed or malice. They breach them through inattention, informality, and a failure to take their role seriously as a legal office rather than a business title. These are the recurring patterns:

• Treating the company as their personal wallet. Drawing money from the company without proper documentation, resolution, or classification — whether as salary, loan, or dividend — creates legal exposure even in owner-managed companies.
• Signing documents without reading them. Whether it is a lease, a loan facility, a supply contract, or a guarantee, a director who signs without understanding what they are agreeing to cannot later claim ignorance as a shield.
• Confusing personal and company interests. A director who is also a shareholder has duties to the company that are separate from, and sometimes in conflict with, their interests as a shareholder. The law requires those roles to be kept distinct.
• Failing to hold board meetings and keep minutes. The absence of board records is devastating in litigation. It prevents a director from demonstrating what was decided, on what information, and for what reason. The Companies Act, 2015 requires that minutes of directors’ meetings be kept for at least ten years.
• Resigning and walking away. A director who resigns when things go wrong does not automatically escape personal liability. Conduct before resignation remains actionable. In some circumstances, the circumstances of the resignation may themselves be relevant.
• Ignoring the warning signs. Cash-flow problems, creditor pressure, inability to pay wages, demands from the Kenya Revenue Authority, threats of litigation, overdraft facilities being recalled — these are not nuisances to be managed. They are legal warning signals. A director who ignores them and carries on as normal is taking a personal risk.

Shareholder Remedies and Board Accountability

Directors are not only accountable to creditors. Shareholders have their own suite of remedies when directors fail in their duties.

Under Part XI of the Companies Act, 2015 (sections 238 to 242), any member of a company may bring a derivative claim — a legal action on behalf of the company — where the cause of action arises from negligence, default, breach of duty or breach of trust by a director. The member must first obtain the leave of the court, which requires satisfying the court that the claim is prima facie meritorious and brought in good faith.

Separately, the Companies Act, 2015 provides for the protection of members against unfair prejudice. Where a director’s conduct unfairly prejudices a member’s interests, the court has wide powers to grant relief, including the purchase of the aggrieved member’s shares at fair value.

These remedies are not merely theoretical. Kenya’s courts have engaged with them in a number of reported decisions, and the statutory framework makes them more accessible now than they were under the repealed Companies Act (Cap. 486).

How to Protect Yourself Before the Lawsuit

The best legal protection is preparation. By the time a creditor’s lawyer is explaining fiduciary duties to a director in court, the strategic options have already been severely narrowed. Here is what a prudent director should have in place:

Maintain Proper Board Records

Every significant decision should be made at a properly convened board meeting, recorded in minutes that reflect the information available at the time, the discussion that took place, and the rationale for the decision. These minutes, kept for the statutory minimum of ten years, are the most important evidence a director has if their conduct is ever challenged.

Declare and Manage Conflicts

Any interest — direct or indirect — in a transaction involving the company must be declared to the board under section 151 of the Companies Act, 2015. The declaration must be specific and timely. The interested director should abstain from voting. Where in doubt, obtain legal advice on whether an interest is disclosable.

Read Before You Sign

This ought to be obvious. It is not always practised. Before signing any guarantee, indemnity, facility letter, long-term contract, or statutory declaration, a director should understand precisely what they are agreeing to. Where the document is complex, the cost of a lawyer reviewing it is trivial compared to the cost of the obligations it creates.

Know the Company’s Financial Position

A director who is not the finance director is not excused from understanding whether the company can pay its debts. The duty of care requires engagement. Every director should regularly review management accounts, understand the company’s cash position, and ask questions when the numbers do not add up.

Take Legal Advice Early When Trouble Looms

The worst time to call a lawyer is after the summons has been served. If a company is experiencing financial difficulty, creditor pressure, employee disputes, or regulatory investigation, legal advice sought early allows for structured responses, evidence preservation, and the possibility of negotiated resolution. Advice sought late is damage limitation.

Consider Directors’ and Officers’ Insurance

Many Kenyan companies, particularly smaller ones, do not carry D&O insurance. The Companies Act, 2015 limits the ability of a company to indemnify directors against their own breach of duty — but properly structured D&O insurance can provide cover for legal costs and certain liabilities. It is worth reviewing the coverage in place.

Practical Warning Signs — Take These Seriously ▸ The company cannot meet payroll on time ▸ Creditors are issuing statutory demands or threatening litigation ▸ KRA has issued demands or begun enforcement action ▸ The company’s bank is recalling or reducing facilities ▸ Board meetings are not being held or minutes are not being kept ▸ A director is entering contracts without board authorisation ▸ Company funds are being used for personal expenses without resolution ▸ You are being asked to sign a guarantee as a condition of a transaction ▸ A shareholder is expressing concerns about how the company is being run Any one of these is a signal to seek legal advice. Several of them together is an emergency.

Final Thoughts for Every Director

The limited liability company is one of the law’s most useful commercial tools. But it is a tool, not a guarantee. The law provides personal protection for directors who act within the framework it sets out — who are honest, who exercise care and diligence, who avoid conflicts, who act in the best interests of the company, and who take their legal responsibilities as seriously as their business ambitions.

For those who treat directorship as a title rather than an office, who sign without reading, who mix personal and corporate interests, who carry on trading when the business is insolvent, and who ignore the warning signs until they become legal proceedings, the protection that limited liability offers is far thinner than they believe.

The conversation you do not want to be having is the one David was having on that Tuesday morning: your lawyer explaining, calmly, that the thing you thought protected you has conditions you never knew existed.

The conversation you want to have is a different one: sitting down with your lawyers before there is a crisis, understanding your duties, structuring your decisions properly, and making sure that if anyone ever looks closely at how you ran your company, what they find is a director who knew what they were doing and did it right.

Speak to Us Before Trouble Starts Directors, founders, board members, and shareholders are welcome to contact Mukamba & Company Advocates for a confidential consultation. Mukamba & Company Advocates 11th & 12th Floor, West Park Towers Mpesi Lane, off Muthithi Road, Westlands, Nairobi, Kenya Phone: +254 706 223 157 | +254 797 450 653 Email: info@mukambalaw.com Web: www.mukambalaw.com Your business decisions deserve the protection of sound legal advice.

Disclaimer: This article is for general information only and does not constitute legal advice. The law described is based on Kenyan statutes and reported decisions as at the date of publication. For advice on your specific circumstances, please consult an advocate. © 2025 Mukamba & Company Advocates. All rights reserved.