South Africa: Expanding Employees’ Duties Under The New Companies Act

Last Updated: 28 July 2011
Article by Jacques van Wyk and Andre van Heerden

The new Companies Act has expanded director duties and extended these to prescribed officers. This has implications for labour law, particularly as executive directors and designated officers are also company employees.

The new Companies Act No. 71 of 2008 (the Act) came into force on 1 May 2011. It significantly expands the duties incumbent upon company directors, a number of which may also be employees.

The Act purports to partially codify and enhance a director's existing common law obligations. Inter alia, it stipulates that a director has a duty to act in good faith; in the best interests of the company; and for a proper purpose. These obligations are not new when it comes to employment law. However, in addition to these, directors must now also act with a degree of care, skill and diligence that may be reasonably expected of a person carrying out the same functions in relation to the company as those carried out by that director and having the general knowledge, skill and experience of that director.

Importantly, the application of these duties is now expressly broadened within section 77 of the Act, through the expansion of the definition of "director"to incorporate "prescribed officers" of the company. The implications for and the role labour law has to play within this new regulated landscape is not addressed within the Act and has yet to elicit sufficient evaluative consideration.

The key questions that arise then are:

  • What, if any, impact do these enhanced obligations of directors and prescribed officers have upon their duties as employees within a company?
  • To what extent does this alter the obligations of the company, qua employer, towards its employees when striving to ensure regulatory compliance?

The Labour Court decision of Chillibush v Johnston & Others (2010) LC 1.11.4. reiterates former case law (Amazwi Power Products (Pty) Ltd v Turnbull (2008) 17 LAC 1.11.33, etc) which envisages a dual capacity for directors who are also employees.

That is: one must view the individual from two perspectives correlative to his or her two capacities within the organization. When engaging in activities designated as being within his or her directorial competence one must have regard to both the company's Memorandum of Incorporation and to its shareholder resolutions. With the advent of the Act one must now take cognisance of the relevant duties enumerated therein; one need not refer to the implied duties emanating from the common law in the absence of a contract, though the common law still remains relevant.

These sources circumscribe and delineate the legitimate boundaries of the director's rights and obligations. When removing a director from his or her post, shareholders resolutions are decisive. There are now also additional methods through which a director may be removed, including director resolution.

In contrast, when engaging in activities designated as being within the purview of the individual's obligations as an employee, the employee's contract of employment, read together with applicable labour legislation, most notably the Labour Relations Act No. 66 of 1995 (LRA), governs the individual's legitimate sphere of rights and obligations. When dismissing an employee in his or her capacity as such one is required to act in accordance with the provisions encapsulated within the LRA. A director who is also an employee of the company is protected qua his status as employee by virtue of section 220 of the LRA.

Of significance is the question of the extent, if any, to which these two capacities may intertwine. That is, given the pragmatic daily convergence of the functions undertaken by senior employees and directors within an organization, to what extent do enhanced duties applicable to directors impinge upon a director's role as an employee within the organization?

What is apparent is that there is significant convergence between the fiduciary duties owed by an employee towards his or her employer and a director towards his or her company. It is hard to imagine breaches of certain duties as not infringing an individual's obligations in terms of both capacities; for example fraud. What is imperative, however, is the recognition that where it is possible to distinguish certain actions as falling under the purview of one function it should be dealt with under the laws applicable to that functional capacity. Most important in this respect are the distinct requirements for the removal of a director and the dismissal of an employee.

Where the director is a senior employee it should be noted that the Act, in section 77(1), makes clear provision for duties to be extended to "prescribed officers" of the company by including these within the expanded definition of "director".

In section 66(10), the Act stipulates that the minister may, "make regulations designating any specific function or functions within a company to constitute a prescribed office for the purpose of th[e] Act". Section 38 of the regulations provide that a person will qualify as a prescribed officer if that person either:

  • exercises general executive control over and management of the whole, or a significant portion, of the business and activities of the company; or
  • regularly participates to a material degree in the exercise of general executive control over and management of the whole, or a significant portion, of the business and activities of the company.

This definition is relatively wide and will encompass most senior managerial employees with a company.

It has been long acknowledged that employees have duties towards their employers, the extent and degree of which vary in accordance with the nature of the employees' functions (Phillips v Feldstone Africa (Pty) Ltd & Another (2004) ILJ 1005 (SCA)). The duties are regulated by employment contracts and implied terms derived from the common law and applicable legislation.

The Act now constitutes legislation which has a direct bearing on the boundaries and extent of obligations on senior employees within a company. These duties and obligations will have an affect on the consideration of an individual's competence within the organization and can be taken into account as grounds for dismissal based upon poor work performance or incapacity. Despite this, the procedures for dismissal under employment law and corporate law will both have to be followed. The fundamental distinction between the new Act and prior legislation is the extent to which directors' duties now have an impact upon the individual in his or her capacity as employee.

Given the enhanced accountability imposed upon directors, one may enquire as to whether the company is enjoined to implement policies seeking to educate directors as to their duties. Although the Act does not mandate such programs, the King III Code on Corporate Governance, 2009, (the Code) recommends that a company implements programs for the, "ongoing training and development of directors" in accordance with a formal process (Principle 2.20).

Although the Code adopts, "an apply or explain" approach which is not binding on companies, it is nevertheless highly influential on corporate governance practices. In addition, listed companies are obliged to comply with a number of the Code's provisions in light of the requirements embodied in the JSE Listing Requirements.

There are no similar obligations imposed upon the company to train employees in their capacities as such, save to the extent that an obligation to provide training is contained with the individual's employment contract or has arisen by way of a legitimate expectation on the part of the employee concerned.

However, Schedule 8 to the LRA clearly states that when considering the dismissal of an employee for poor performance or misconduct, regard will be had to whether or not the employee was aware (or should reasonably have been aware) of the required standard of conduct or performance. To the extent that the Act introduces new or more stringent requirements for conduct and performance, there may therefore be a positive duty on an employer to ensure that senior employees and directors are educated on the requirements of the Code and the Act.

In conclusion, the Act has aguably expanded previous duties incumbent upon directors while simultaneously expanding the ambit of such duties to senior employees. To the extent that these duties impose more cumbersome obligations on employees, they have a bearing on the standard of conduct and performance required of such employees. Failure to comply could have a significant impact upon that individual in his or her capacity as an employee in addition to his or her position as a director as well as on the company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions