South Africa: Read This Before Becoming A Company Director

Last Updated: 20 December 2011
Article by David Luckett and Kelly Kramer

The duties of directors are primarily determined by common law, the new Companies Act (71 of 2008, the shareholders agreement and the memorandum of incorporation of the company, service agreements (specifically concluded between the director and the company) and resolutions passed at members' or directors' meetings.

The New Act sees the partial codification of the common law duties of directors and has resulted in the tightening up of directors' duties and liabilities. For the first time in history the potential liabilities associated with being a director may just outweigh the "lifestyle".

Common Law Duties
Apart from the duties imposed on directors in terms of the New Act, a director is, at common law, subject to fiduciary duties requiring him to exercise his powers in good faith, with honesty and loyalty and for the benefit of the company. In addition, the directors have a duty to exercise reasonable care and skill. Almost all the provisions to be detailed in this article have not previously been codified under South African legislation. However they do not replace the common law duties of directors. The codified provisions, in terms of the New Act govern directors' conduct only from 1 May 2011.

The Fiduciary Relationship
Fiduciary duties of directors are of even greater importance as the New Act, in s66(1), confers a statutory power and duty on the directors to manage the business of the company. Since this power derives from statute and not the Memorandum of Incorporation of the company, it is subject to shareholder control to a much lesser extent than was previously the case. A director stands individually, from the time of his appointment, or, if not formally appointed, from the time he commences to act as such, in a fiduciary relationship to the company.

This fiduciary relationship arises from the purpose for which a director is entrusted with his office and for which he and his co-directors are entrusted with their powers to manage the affairs of the company.

These duties are owed by the director to his company and are, therefore, primarily protective of the company and its shareholders. Directors can neither divest themselves of nor be exempted from their fiduciary duties.

In this fiduciary capacity, a director assumes two roles, namely:

  • As an "agent" acting on behalf of the company; and
  • As a trustee who controls company assets.

Codification of the common law under the New Act

Codification of the common law duties of directors takes place under s76 of the New Act. This section, applies to directors, alternate directors, prescribed officers and committee members irrespective of whether or not such committee member is also a member of the company's board. S76 provides that a director must exercise his powers in good faith and for a proper purpose. That exercise must be in the company's best interests and with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions as those of the director, who has the general knowledge, skill and experience of that director. S76(2) prescribes that a director must not use his/her position or any information gleaned while acting as a director to gain any advantage for anyone other than the company or a wholly-owned subsidiary of the company or to knowingly cause harm to the company or a subsidiary of the company.

S76(4) introduces the business judgment rule. It has been wrongly assumed to be an additional duty of a director whereas it in fact alleviates, to some extent, the new less subjective and rigorous duties that have been codified in the New Act. It provides that, in taking a decision, a director will satisfy his/her statutory duties (but not necessarily his/her common law duties) if the director has taken reasonable steps to become informed about the matter and, in addition, has no material financial interest in the matter, disclosed such interest, or rationally believed the decision was in the best interests of the company.

Section 75, in accordance with the common law "no-conflict" or "secret profit" rule and section 234 of the Companies Act No 61 of 1973 (the "Old Act"), requires that directors avoid placing themselves in a situation where their personal interests would conflict with those of the company. In terms of this section, a director is required to disclose any direct material personal financial interest that he or she or a related person has in respect of a matter which is then to be considered at a meeting of the board. This provision does not alter the position under the Old Act.

Further additions under the New Act include s77, which deals specifically with the liability of directors.

Under s77, a director of a company may be held liable in accordance with the principles of the common law relating to a breach of a fiduciary duty, a duty of care and skill, as well as a breach of any provision of the company's Memorandum of Incorporation for any loss, damages or costs sustained by the company.

S77(3) provides for specific liabilities. In terms of this section a director of a company is liable for any losses, damages or costs sustained by the company as a direct or indirect consequence of the director having acted without the necessary authority, carried on the business of the company recklessly or for any fraudulent purpose, or traded under insolvent circumstances.

S77(9) provides a possible escape for one or more of the directors from s77(3) under certain limited instances (the de facto position under the New Act is that all the directors will be held jointly and severally liable). In any proceedings against a director, other than for wilful misconduct or wilful breach of trust, the court may relieve one or more directors, either wholly or partly, from any liability set out in this section if it appears that the director has acted honestly and reasonably or it would be fair, in the circumstances, to excuse the director.

Duties Owed to Subsidiary and Holding Companies

At common law, a director of a subsidiary company does not owe any fiduciary duty to its parent or holding company or the group of companies to which the subsidiary formed a part and neither does the director of a holding company owe any fiduciary duties to a subsidiary. Under common law each company in a group of companies is regarded as a separate legal entity with its own rights and liabilities (unless the court decided to pierce the corporate personality of one or more of them).

This position may have been changed slightly by the New Act, at least with regard to subsidiary companies, in terms of s76(2)(a,) which states that a director must not use his or her position, or any information obtained while acting in his or her capacity as a director, to gain an advantage for him or herself or another person other than the company or a wholly owned subsidiary of the company and must not knowingly cause harm to the company or subsidiary of the company.

The inclusion of a subsidiary seems to extend the common law principle to avoid a conflict of interest in respect of subsidiaries as well.

Criminal and Civil Liability

Criminal liability is covered under s213 to s217 of the New Act and deals with criminal liability in more detail than under the Old Act. Under s424 of the Old Act it was a criminal offence to knowingly carry on the business of a company recklessly or with the intent to defraud creditors. In such an instance a creditor of the company would also have had a civil claim against a director for any losses suffered by that creditor. Under the New Act, directors can be held civilly liable in terms of s76(2) for breaches of, inter alia, the provisions of s76 and s77(3), as described above, but only insofar as such conduct harms the company; it does not seem to provide a right for a creditor who has suffered loss to sue a director. However, s218(2) of the New Act states that any person who contravenes any provision of the Act is liable to any other person for loss caused to that person as a result of such contravention. Therefore, a creditor would probably be able to sue a director in terms of this provision.

In addition s214 of the New Act provides for criminal liability if an act of fraud has been purported by any person in relation to a company, its creditors or employees (such liability is not confined to directors only).

The New Act also goes further and stipulates (under s213) that it is an offence to disclose any confidential information obtained in carrying out any function in terms of the New Act. It is now also an offence to hinder or improperly attempt to influence the administration of the New Act, in terms of s215.

Conclusion

Although the New Act does increase the number of duties and the potential liabilities of directors, it provides a degree of clarity regarding the conduct which is expected of someone accepting the position of a director.

In addition, a director can find comfort in the fact that the new direction adopted by the Act will be very much to the benefit of both themselves and the companies they direct, if they operate with honesty, integrity, competence and expertise.

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.

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