Many strive to become a director of a successful company or organisation, however, they do not, or fail to, fully appreciate the duties and responsibilities thereof. This article aims at providing a brief overview of directors’ duties and liability, noting the responsibilities and importance of holding office and the manner in which one may mitigate risk and liability.
Before the 2008 Companies Act (“the Act”) came into effect, fiduciary duties of directors were derived from the common law and the courts refined these duties to the extent that directors had to act in the utmost good faith and in the best interests of a company, which included the need to exercise care, skill and diligence when conducting company affairs. The Act implemented the codification of these duties and provided a codified framework from which directors could conduct company affairs in confidence, without the fear of incurring liability. However, where the Act does not deal with a duty of a director the common law position will still apply.
In order to fully comprehend directors’ liability, it is important to consider section 76 of the Act, which sets out the duties of directors when conducting business. Section 76 addresses the standards of directors’ conduct and extends the common law fiduciary duties, which requires directors to exercise and perform their duties:
- in good faith and for proper purpose;
- in the best interests of the company; and
- with the degree of care, skill and diligence that may be reasonably expected of a
person in carrying out the same function in relation to a company as carried out by a director, and having the general knowledge, skill and experience of that director, which is an objective test.
Section 76 further states that a director will be seen to have satisfied the functions above if the director:
- has taken reasonably diligent steps to become informed about a matter;
- has made a decision, or supported the decision of a committee or the board with regard to that matter; and
- had a rational basis for believing, and did believe that the decision was in the best interests of the company.
Furthermore, a director is required to communicate to the board, at the earliest practicable opportunity, any material information that comes to his/her attention unless he/she:
- reasonably believes the information is publicly available or known to other directors; and
- is bound by a legal or ethical obligation of confidentiality.
Section 77 of the Act sets out the statutory liability imposed on directors. A director of a company may be held liable for the following:
- breaching his/her fiduciary duties relating to non-disclosure or personal interests; misusing the position as director to gain personal advantage; or not acting in good faith and for proper purpose or in the best interest of the company;
- not acting with the requisite care, skill and diligence (Non-Fiduciary Duty but is based on delictual or Aquilian liability for negligence);
- acting in the name of the company despite knowing he/she does not have the authority to do so;
- reckless trading (including trading under insolvent conditions);
- an act calculated to defraud a creditor, employee or shareholder of the company, or had another fraudulent purpose;
- signing, consenting to or authorising the publication of financial statements that are false and misleading in a material respect;
- issuing unauthorised shares or securities;
- providing financial assistance contrary to the provisions of the Act;
- approving a distribution or acquiring the company's own shares contrary to the provisions of the Act;
- breaching the provisions of the Act or the company’s Memorandum of Incorporation (“MOI”);
- failing to vote against certain decisions as required by the Act; and
- for any loss, damages or costs sustained by the company as a consequence of any breach by the director of a duty contemplated in section 76 of the Act.
The above list is non-exhaustive and, as set out in section 77(3)(b), a director of a company is liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director having:
- agreed in the carrying on of the company’s business despite knowing that it was being conducted in a manner prohibited by section 22(1);
- being a party to an act or omission by the company despite knowing that the act or omission was calculated to defraud a creditor, employee or shareholder of the company, or had another fraudulent purpose;
For all purposes section 22(1) stipulates that a company must not carry on its business in a reckless manner, with gross negligence, with intent to defraud any person, for any fraudulent purpose or to trade under insolvent circumstances.
Therefore, in the strict sense, directors may be held personally liable to the company for any loss or losses incurred through knowingly carrying on the business of the company recklessly, with gross negligence, with the intent to defraud any person or for any fraudulent purpose.
The above list is lengthy in nature and may be seen as dissuasive, however, section 77(9) of the Act brings some relief to directors, whereby they can raise the defence of honest and reasonable behaviour. This section states that in any proceedings against a director other than wilful misconduct or wilful breach of trust, the court may relieve the directors either wholly or in part from liability set out in section 77 or on any terms the court deems just if:
- it appears to the court that the director has acted honestly or reasonably; and
- having regard to all the circumstances of the case, including those connected with the appointment of the director, it would be fair to excuse the director.
A director can also be held criminally liable if a director or person was knowingly party to an act or omission by the company calculated to defraud a creditor or employee of the company or a holder of company securities or with another fraudulent purpose (section 214 of the Act). A further provision under which a director can be held liable comes in the form of section 218(2), which states that any person who contravenes any provision of the Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.
As aforementioned, there are ways in which risk can be mitigated, as permitted in terms of the Act. A company has the power to indemnify a director from liability in terms of section 78(5), except for the following:
- wilful misconduct or breach of trust on the part of the director;
- where a fine has been imposed as a consequence of the director having been convicted of an offence;
- where a director acted recklessly, or despite knowing he/she lacked authority, acted in the name of the company, or acted with the intent to defraud creditors, or acted with any other fraudulent purpose.
It must be noted that in terms of section 78(2), any provision of an agreement, MOI, rules of a company or resolution adopted by a company, whether express or implied, is void to the extent that it directly or indirectly purports to relieve a director of a duty contemplated in section 75 or 76; or liability contemplated in section 77; or negate, limit or restrict any legal consequences arising from an act or omission that constitutes wilful misconduct or wilful breach of trust on the part of the director.
In conclusion, directors are to take cognisance of their duties, whether common law or statutory, in order to ensure that the financial interests of the company are kept close to heart. This article provides a general indication of directors’ duties and liability and the mitigation of same, however, it should not prevent a person from holding office, but rather encourage one to acquaint him/herself with the required duties and responsibilities.
Prepared By: Ruan Steyn (Litigation Department) (Umhlanga Office)
Telephone: 031 566 2207
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