Summary
- The core statutory duty is in s. 157(1) of the Companies Act 2025: a director "must at all times act and use reasonable diligence in the discharge of the duties of his or her office". Breach exposes the director to liability to the company for profits and losses and to a fine of up to $5,000 or 12 months' imprisonment (s. 157(3)).
- The statute sits on top of the general law: s. 157(4) preserves "any other written law or rule of law relating to the duty or liability of directors", which in GMC means the common law and equity as received under the Application of Laws Act 2024.
- Every director must disclose interests in transactions with the company (s. 156); transactions with directors or their connected persons that exceed constitutional limits are voidable, with an obligation to account and indemnify (s. 25C).
- Loans, guarantees and credit transactions for directors are prohibited for companies other than exempt private companies, with narrow exceptions (s. 162); breach carries up to $20,000 or two years' imprisonment.
- Directors can rely on employees, advisers and fellow directors in good faith (s. 157C), cannot be exempted from liability by the constitution (s. 172) but may be insured (s. 172A), and may seek relief from the court where they acted honestly and reasonably (s. 391).
Where a GMC director's duties come from
Directors of a GMC company answer to two overlapping sources. The Companies Act 2025 codifies specific duties, disclosure obligations and prohibitions, many with criminal penalties. Alongside it sits the general law: under s. 3 of the Application of Laws Act 2024, the common law and equity of established common law jurisdictions, including received English common law and equity, applies in GMC so far as suited to its circumstances, and s. 157(4) confirms that the statutory duty "is in addition to and not in derogation of any other written law or rule of law relating to the duty or liability of directors or officers". The fiduciary duties of loyalty, good faith and proper purpose therefore continue. Throughout, "$" means United States dollars (s. 4A).
Capacity, authority and who bears the risk of exceeding it
A GMC company has "full capacity to carry on or undertake any business or activity, do any act or enter into any transaction" (s. 23(1)), although its constitution may restrict that capacity (s. 23(1B)). An act beyond a restriction is not invalid "by reason only" of the lack of capacity (s. 25(1)); the point may be raised only in proceedings to restrain the act, in proceedings by the company or a member against present or former officers, or on a winding-up application by the designated officer (s. 25(2)).
Outsiders are protected. There is no constructive notice of the constitution (s. 25A), and in favour of a person dealing with the company in good faith the directors' power to bind it "is deemed to be free of any limitation under the company's constitution" (s. 25B(1)), including limits in shareholder resolutions and shareholders' agreements (s. 25B(3)). Good faith is presumed unless the contrary is proved (s. 25B(2)).
Exceeding constitutional or shareholder-agreed limits will therefore usually not unwind the deal; the risk stays with the director, since s. 25B(5) preserves "any liability incurred by the directors ... by reason of the directors exceeding their powers".
Directors' own transactions: ss. 25C and 25D
Where a transaction's validity depends on s. 25B and the parties include a director of the company or its holding company, or a person connected with such a director, it is voidable at the instance of the company (s. 25C(3)). Whether or not avoided, the director or connected party and any authorising director must account for any gain and indemnify the company for any loss (s. 25C(4)). Voidability ends if restitution is impossible, the company is indemnified, bona fide third-party rights would be affected, or the company affirms (s. 25C(5)).
"Connected" persons under s. 25D include a director's spouse and children (s. 25D(2)(a)), a body corporate in which the director and connected persons hold at least 20% of the shares or more than 20% of the votes (s. 25D(2)(b)), trustees of trusts benefiting them, and the director's partners and firms (s. 25D(1)). A fellow director is not, as such, connected (s. 25D(1)(f)).
The general duty: s. 157
Section 157(1) requires a director "at all times" to "act and use reasonable diligence". Section 157(2) extends to every officer or agent of the company a prohibition on making "improper use of his or her position" or of information acquired through it "to gain, directly or indirectly, an advantage for himself or herself or for any other person or to cause detriment to the company". "Agent" expressly includes the company's banker, solicitor and auditor, past or present (s. 157(5)).
Breach has two consequences. Civilly, the officer or agent "is liable to the company for any profit made by him or her or for any damage suffered by the company" (s. 157(3)(a)). Criminally, it is an offence with a fine of up to $5,000 or imprisonment for up to 12 months (s. 157(3)(b)).
Management is placed in the board: the business "is to be managed by, or under the direction or supervision of, the directors" (s. 157A(1)). A sole director may satisfy any requirement for a declaration at a board meeting by recording and signing it (s. 157B).
Reasonable reliance: s. 157C
A director may rely on reports, financial data and advice from an employee believed on reasonable grounds to be reliable and competent, a professional adviser or expert within their competence, or another director or committee acting within designated authority (s. 157C(1)), but only if the director acts in good faith, "makes proper inquiry where the need for inquiry is indicated by the circumstances" and has no knowledge that reliance is unwarranted (s. 157C(2)). Delegation is allowed; abdication is not.
Disclosure of interests: s. 156
Every director or chief executive officer "in any way, whether directly or indirectly, interested in a transaction or proposed transaction with the company" must, as soon as practicable, declare the nature of the interest at a board meeting or give the company written notice of its nature, character and extent (s. 156(1)–(2)). An interest consisting only of membership of or a debt owed by another corporation is excluded where it "may properly be regarded as not being a material interest" (s. 156(3)). Section 156(6) separately requires disclosure of offices and property that could create a conflict.
The secretary must minute every declaration (s. 156(11)). Non-compliance is an offence carrying a fine of up to $5,000 or 12 months' imprisonment (s. 156(15)), and the section is in addition to the general law on conflicts (s. 156(14)). Disclosure does not itself authorise the transaction; whether the director may vote remains a matter for the constitution and the general law.
Restricted transactions with directors: ss. 162 and 163
Section 162 lists "restricted transactions": loans and quasi-loans to a director of the company or a related company, guarantees or security for such loans, credit transactions for the director's benefit, and arrangements designed to achieve the same result (s. 162(1)); the director's spouse and family are included (s. 162(8)). A company "other than an exempt private company" must not make one (s. 162(2)). An exempt private company is a private company with no more than 20 members in which no corporation holds a beneficial interest (s. 4(1)), so a founder-owned company is typically exempt but a company with a corporate shareholder is not.
The exceptions are narrow: funding a director's expenditure for company purposes, one home loan for a full-time director, an approved employee scheme, and ordinary-course lending by a company regulated by GFSO or banking law (s. 162(3)). The first two require prior general-meeting approval, or repayment within six months after the next annual general meeting if approval is refused (s. 162(4)). Authorising directors are jointly and severally liable to indemnify the company (s. 162(5)) and each commits an offence punishable by a fine of up to $20,000 or two years' imprisonment (s. 162(6)).
Section 163 extends the regime to loans, guarantees and credit transactions in favour of another company or LLP in which a director or directors hold 20% or more of the votes, unless approved in general meeting with the interested directors and their family members abstaining (s. 163(1)). Sections 163A and 163B except expenditure on defending proceedings and on regulatory action or investigations.
Decisions the board cannot take alone
Two powers are reserved to members regardless of the constitution: directors must not issue shares without prior general-meeting approval (s. 161(1)), and must not dispose of "the whole or substantially the whole of the company's undertaking or property" without it (s. 160(1)). A member may restrain a breach (s. 160(2)), although a good-faith purchaser for value without notice takes a valid title (s. 160(3)).
Capital decisions carry personal criminal exposure
Directors who approve payments to shareholders carry the solvency risk personally. Approving a share buyback "knowing that the company is not solvent" carries a fine of up to $100,000 or three years' imprisonment (s. 76F(3)); a false capital-reduction confirmation not believed to be true is an offence (s. 78J); and solvency statements under s. 7A must be signed by every director taking account of all liabilities, including contingent ones (s. 7A(2)–(3)). See our guide to share capital in GMC.
The resident director and the six-month rule
Every company must have at least one director ordinarily resident in GMC (s. 145(1)), and no director may resign if that would leave none (s. 145(5)); the resident director is locked in until replaced. The personal exposure under s. 145(10) falls on members: where a company trades for more than six months without a resident director, a member who knows of it is liable for debts contracted after that period. A sole director who is also sole member wears both hats (see our guide to the real substance requirements for a GMC company).
Records, filings and disqualification
The company must keep accounting records that "sufficiently explain the transactions and financial position of the company" for five years (s. 199(1)–(2)). The board must keep in order: registers of charges, registrable controllers, nominee directors and nominee shareholders; changes in officer particulars lodged within 14 days; AGM within 6 months and annual return within 7 months of year end; financial statements to members at least 14 days before the AGM; minutes recorded within 1 month; IFRS audited accounts with the auditor appointed within 3 months; and a first financial year of no more than 18 months without Registrar approval. Dormant status affects audit and reporting only. Dissolution is by strike-off or court winding up under the applied Insolvency, Restructuring and Dissolution framework. Persistent filing default can lead to a five-year bar from management (s. 155). A director of three or more companies struck off within five years is disqualified for three years, or five for a repeat (s. 155A(1)–(1A)). An undischarged bankrupt may not act without leave (s. 148(1)), and conviction for fraud or dishonesty triggers disqualification under s. 154.
Insolvency-related liability, including liability for trading while insolvent, is governed by the Insolvency, Restructuring and Dissolution Act 2018 as applied in GMC by Schedule A to the Application of Laws Act 2024, and is outside the scope of this article.
Protection: indemnities, insurance and court relief
Any provision, in the constitution or a contract, exempting an officer from liability for negligence, default, breach of duty or breach of trust is void (s. 172(1)), as is a company indemnity except as permitted (s. 172(2)). The permitted forms are company-purchased insurance (s. 172A) and a third-party indemnity that cannot cover criminal fines, regulatory penalties or the costs of unsuccessfully defending criminal proceedings or claims by the company (s. 172B(1)).
Finally, s. 391 gives the court a discretion to relieve an officer wholly or partly from liability for negligence, default, breach of duty or breach of trust, including liability to account for profits, where the person "has acted honestly and reasonably" and "ought fairly to be excused" (s. 391(1)–(1A)). A director who anticipates a claim may apply for relief in advance (s. 391(2)).
Practical checklist / Next steps
- Adopt a standing conflicts register and give general notices under s. 156(2) on appointment; minute every declaration (s. 156(11)).
- Before any transaction with a director or connected person, map it against ss. 25C–25D and 162–163 and obtain general-meeting approval where required.
- Check whether the company is an exempt private company; if a corporate investor comes in, the s. 162 loan prohibition starts to apply.
- Document reliance on advisers and management to bring the board within s. 157C.
- Keep share issues and major disposals within ss. 161 and 160 approvals.
- Put directors' and officers' insurance in place under s. 172A and draft indemnities within s. 172B.
- Keep a succession plan for the resident director so that s. 145(5) does not trap the incumbent.
Frequently asked questions
What is the basic legal duty of a director of a GMC company?
Section 157(1) requires a director to act and use reasonable diligence at all times. The general law fiduciary duties continue to apply alongside it (s. 157(4)), and breach can lead to liability to the company and to a fine of up to $5,000 or 12 months' imprisonment (s. 157(3)).
Can a GMC company lend money to its director?
Only if it is an exempt private company, or within the narrow exceptions in s. 162(3) with general-meeting approval. Otherwise the loan is prohibited and each authorising director faces a fine of up to $20,000 or two years' imprisonment (s. 162(6)).
Is a contract valid if the directors exceeded their authority?
Usually yes, in favour of a counterparty acting in good faith (s. 25B). The director remains liable for exceeding the limits (s. 25B(5)), and a transaction with a director or connected person is voidable by the company (s. 25C).
Can the constitution exempt directors from liability?
No. Such provisions are void (s. 172(1)). The company may buy insurance (s. 172A) and give a limited third-party indemnity (s. 172B), and the court may relieve a director who acted honestly and reasonably (s. 391).
Key takeaways
- The s. 157 duty of honesty and reasonable diligence is backed by both civil liability and criminal penalties, and the general law fiduciary duties apply on top.
- Conflicts are managed through mandatory disclosure (s. 156), voidability and accounting for transactions with directors (s. 25C) and a prohibition on director loans outside exempt private companies (s. 162).
- Constitutional exemptions are void, but insurance, limited indemnities and court relief are available.
- Basnet Law advises boards on GMC governance structures that meet these sections and on the position of resident directors.
This article is general information about the law of the Gelephu Mindfulness City Special Administrative Region as at the date above. It is not legal advice and does not create a lawyer–client relationship.
You may contact Basnet Law at basnet@basnetgmc.com or office@basnetgmc.com for any legal queries related to GMC.
References
- Companies Act 2025, ss. 4(1) ("exempt private company"), 4A, 7A, 23, 25, 25A, 25B, 25C, 25D, 76F, 78J, 145, 148, 154, 155, 155A, 156, 157, 157A, 157B, 157C, 160, 161, 162, 163, 163A, 163B, 172, 172A, 172B, 199, 391
- Application of Laws Act 2024, s. 3 and Schedule A (Insolvency, Restructuring and Dissolution Act 2018)
- GCRO FAQ for GMCA Entities (3 June 2026, v0.2), Gelephu Corporate Registration Office
