Not So Fast – To Whom Do Directors Owe a Fiduciary Duty?
The Companies Act 71 of 2008 (the Act) contains provisions whereby the directors of a company may be held liable in the event of not conducting themselves in accordance with expected standards.
As a starting point, Section 66 provides that the affairs of the company are under the direction or management of its directors who exercise such authority as long as it is not against the Memorandum of Incorporation (MOI) or the Companies Act. Be that as it may, the Companies Act goes beyond the Common law fiduciary duty of directors towards the company, but demands that they act in honesty, good faith, in the best interests of the company and with a degree of care and skill. This is all espoused in Section 76(3) of the Companies Act of 2008.
Section 77 in particular, deals with the liability of company directors and provides in (2) (a) that a director may beheld liable for loss, damages or costs emanating from the conduct of the director which is in breach of the duties expected of them in the Act and more specifically, section 76 of the Act.
With that being said, in this article we will consider an instance where a director has breached his/her fiduciary duty, and further elaborate on:
- the parties to whom a director owes a fiduciary duty;
- which parties have locus standi to hold the director liable in a court of law.
Hlumisa Investment Holdings (RF) Ltd and Another v Kirkinis and Others(1423/2018) [2020] ZASCA 83 (3 July 2020)
In the above case, the Supreme Court of Appeal(SCA) had to determine whether the shareholders of AfricanBank Investments Limited (ABIL) could use section 218 (2) as a remedy against the conduct of directors of ABIL which caused the reduction in value of their shares. The shareholders alleged that in breach of 76 (3) and 22 (1) the directors had failed in their fiduciary duties and conducted the affairs ofABIL recklessly and negligently, resulting in loss to the value of their shares.
The SCA dismissed the appeal of the shareholders, citing that there is no link between the contravention of the Act and the loss suffered. This is because the loss of the shareholders is reflective of the loss of the company, and therefore under the circumstances the proper Plaintiff should be the company and not the individual shareholders. The Court confirmed that the fiduciary duties of the directors are owed to the company itself and not to the shareholders per se. In consequence of this Judgment, the following is worth noting:
· Directors do not have a fiduciary duty towards shareholders, but towards the company itself;
· The reflective loss of shareholders cannot be claimed from directors;
· The loss in value of the shareholder’s interest is reflective of the company’s loss;
· The company itself is the one that may sue directors for recklessness and dereliction of their fiduciary duties.
Shareholders may indeed sue upon the winding up of the company, or use a derivative action under Section 165 as was noted in Lewis Group Ltd v Woollam and Others 2017 (2) SA 547 (WCC). However, a demand to have legal proceedings commenced to protect the interests of the company may also be set aside by the Court as was held in Marib Holdings (Pty) Ltd v Parring NO. 2020 JDR 1576 (WCC) but still, it provides an alternative relief for aggrieved shareholders.
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