Deciphering Directors Duties and Liabilities in South Africa's Corporate Landscape

South African companies act through two bodies of people – its board of directors as well as it shareholders.

Shareholders and directors have two completely different roles in a company. The shareholders own the company by owning its shares and the directors manage it.  Once the shareholders have completed their purchase of shares and the shares are fully paid for, no further money is payable by the shareholders.

A company primarily acts through its board of directors, which are considered to be the “brain” of the company tasked with the management of the company’s business and it’s affairs, which includes making strategic and operational decisions and ensuring that the company meets its statutory obligations. A directors role includes participation in board meetings to enable the board to reach these decisions and make sure that the company’s obligations are fulfilled by implementing effective decision making processes that negates the personal biases that affect how decisions are made.

The directors are effectively the agents of the company, appointed by the shareholders to manage its day-to-day affairs. The basic rule is that the directors should act together as a board but typically the board may also delegate certain powers to individual directors or to a committee of the board.

Generally, the directors incur no personal liability as all their acts are undertaken as agents for the company. However, there are certain instances where liability may be imposed upon the directors by court, more particularly in instances where there has been wrongful or fraudulent trading.

The failure by directors to meet their duties could lead to catastrophic and serious potential liabilities as set out in terms of the new Companies Act No. 71 of 2008 (“The Companies Act”) which was signed into law on 8 April 2009 and became operative from 1 May 2011. The new Act codifies the common law position and has changed South Africa’s corporate landscape significantly by transforming the roles and duties of directors as well as the liability associated therewith.

It is in this context, speaking of the fiduciary duties of the directors, that it is essential to delve into the risks and uncertainties associated with directors duties, and the liabilities that may arise thereunder. ‍

What does a directors duties towards a company entail? ‍

A directors' key purpose is to ensure the company's prosperity by collectively directing the company's affairs, whilst meeting the appropriate interests of its shareholders and stakeholders.

Section 76 of the Companies Act elaborates on the standard of conduct which directors are expected to adhere to, and extends beyond the common law by compelling directors to act honestly, in good faith and in a manner that the director reasonably believes to be in the best interest of a company.

Directors are required, in terms of Section 76(3) of the Companies Act, to:

• act in good faith and for a proper purpose,
• act in the best interest of a company, and
• act with the degree of care, skill and diligence that may be expected of a person carrying out the same functions in relation to the company as carried out by that director, and having the general knowledge, skills and experience of that director.

Section 76(4)(a) of the Companies Act, 2008, which rubs shoulders with the American idea of the “business judgment rule” (which originated almost two centuries ago) sets out the defences that a director can rely on ward off liability in terms of Section 76. Section 76 (4) states that a director would be considered to have acted or performed his/her powers and functions in the best of the interests, and have complied with section 76(3) of the Companies Act if the director:

• had taken reasonably diligent steps to become informed about the matter. The director is thus expected to have considered all material information that any reasonable director in his shoes would have taken into consideration prior to having made the decision.
• had no material personal financial interest in that matter or, if he did, followed the requisite disclosure and recusal provisions contained in s75 of the 2008 Act; In order to determine what is material a court will need to make an objective assessment, and the outcome will depend on the facts and circumstances of a particular case under consideration. The Director should at all times make proper and honest disclosures. Section 75 in particular requires that if a director has a personal financial interest in the subject matter of the decision-making process, or knows that a related person is so interested, the director is expected to make certain disclosures regarding such interests prior to the board meeting.
• had a rational basis for believing, and did believe, that the decision was in the best interests of the company.

The purpose of the business judgement rule is to prevent directors being held liable, with the benefit of hindsight, for honest errors of judgement.

The business judgement rule is supplemented with the ‘reliance rule’, in s76(4)(b) and (5) of the 2008 Act. The reliance rule provides that, in exercising his functions as such, a director is entitled to rely on others (such as employees, committees or advisors of the company) reporting to him, as well as opinions and information provided to him.‍

Liabilities imposed on directors‍

Section 77 of the Companies Act set out the statutory liabilities which may be imposed on directors. In terms of section 77(2)(a) of the Act, a director of a company may be held liable (in accordance with the principles of the common law relating to the breach of a fiduciary duty) for any loss, damages or costs sustained by the company as a consequence of any breach by the director of the duties contemplated, inter alia, in section 76 of the Act.

The Companies Act furthermore provides for liability for directors in instances where a director:-

• acted in the name of the company or signed anything on behalf of the company whilst the director knew he or she lacked the necessary authority;
• has breached their fiduciary duties;
• persisted and went along with any action or decision despite knowing that it amounts to reckless trading. This could occur when a company continues to incur debts, where, in the opinion of a reasonable business person standing in the shoes of the company directors, there would be no reasonable prospect of the creditors receiving payment when due.
• conducted the company’s business in contravention of the provisions in the Companies Act relating to pre-incorporation contracts;
• the director was part of an act or omission knowing that the intention was to defraud shareholders, employees or creditors
• signed, consented to, or authorised the publication of any financial statements that were false or misleading in any material respect;
• signed, consented to or authorised, the publication of a written statement that contained “untrue statements” or a statement to the effect that a person had consented to be a director of the company, when no such consent had been given, despite knowing that the statement was false, misleading or untrue; and
• was present at a meeting or participated in making a decision at a meeting where there was non-compliance with the formalities prescribed in the New Act.

The director may also attract Criminal Liability in terms of Section 214 of the Companies Act in instances where the director has acted in a manner calculated to defraud creditors.

The Companies Act makes it clear that a director or prescribed officer is jointly and severally liable with any other person who is or may be held liable for the same act. It is however notable that any claim for loss, damages or costs for which a director is or may be held liable in terms of the Companies Act prescribes after three years after the act or omission that gave rise to that liability.

Many directors are over-reliant on insurance and think they are covered for any eventuality. They think that either shareholders, the company or insurance will bail them out: unfortunately this is not always the case.

It is clear that directors could be held personally liable for a host of issues. If you are a director with a current or prospective dispute arising from issues above, get in touch with our office to see how we can assist.