South African law does not impose an all-embracing code of conduct on company directors. In practice, a company's constitution, comprising its Memorandum and Articles of Association, prescribes the extent of the directors' powers. A director who acts outside the ambit of the company's constitution is accordingly answerable to the company for his conduct. The function of the law is to supplement and add detail to the responsibilities of directors as contained in a company’s internal constitution and to deal with areas on which a company's constitution is usually silent.
The relevant law which supplements a company’s constitution may be found in statute – primarily the Companies Act 61 of 1973 (the Companies Act") and case law. Furthermore a director’s duties may be set out in a director’s employment contract (if any) with the company.
Common law duties
At common law a director owes two types of duty to the company, a fiduciary duty and a duty of skill and care.
(a) Fiduciary duty
A fiduciary is a person who is in a special position of trust. A director is a fiduciary and therefore must act in good faith in his dealings with or on behalf of the company and he must exercise the powers and fulfil the duties of his office honestly. A director cannot be relieved of his duty in the company’s Articles of Association, or in contract. Any act amounting to an evasion of his duty is seen in the same light as a breach of the duty itself.
His fiduciary duty has four aspects:-
a duty to act in good faith. A director has a duty to act in good faith and do what he honestly believes is in the best interests of the company;
a duty to exercise his powers for a proper purpose. A director must not use his powers for improper purposes, even if he believes that to do so would be in the best interests of the company. In addition he must exercise his powers as director for the benefit of the company and for the purpose of which they were conferred;
conflicts of interest. A director must not put himself in a position where there is an actual or potential conflict between his duty to the company and his personal interests; and
misuse of company property. A director is regarded as a trustee of company property. Accordingly, he must not knowingly participate in or ignore the misapplication of company property.
(b) Duty to display reasonable of skill and care
When a director is acting in the company's interests he is to exercise whatever skill he possesses and reasonable care. This duty has two aspects:-
degree of skill
A director is not expected to exercise a level of skill he does not have. The level of skill required of a director is subjective. He is not expected, merely by virtue of his office, to possess any particular skills. His performance will be judged by the way he applies any skills which he actually has. However, in the case of an insolvent company a director incurs personal liability for wrongful trading if he does not display both the general knowledge, skill and experience that he actually has and that which might be reasonably expected of someone carrying out his function within the company;
degree of care
The degree of care required is different for executive and non-executive directors. The non-executive director must display the same care a layman might be expected to take in the same circumstances on his own behalf. By contrast, an executive director's service contract will normally stipulate that he must devote his full attention to the business of the company.
The common law principles governing a director's conduct set out above are augmented by a range of specific duties imposed by statute. Some of these duties are imposed not on the directors in their own right, but on the company. However, since the directors are responsible for the performance of the statutory duties imposed on the company, it is they who must ensure that the company does everything that is required of it. Consequently a vast range and number of managerial duties are indirectly imposed on directors. The following requirements are worthy of particular note:-
(a) Restrictions on directors taking financial advantage
Directors must disclose the nature of any interest in a contract or proposed contract with the company at the first board meeting at which such contract is to be discussed. A director who fails to comply commits a criminal offence punishable by a fine.
A director who wishes to acquire assets from or transfer assets to the company which exceed a certain value must have that contract or arrangement approved by the members of the company in general meeting. Otherwise the director can be compelled to make restitution to the company or, if this is no longer possible, pay damages.
(b) Share dealings
Issue of shares by directors, to themselves and their beneficiaries may only take place in very limited circumstances.
A director must, within five days of his appointment, notify the company in writing of his interests in shares and debentures of the company and other companies in its group. Any subsequent change in these interests must be notified within five days of the change.
A register of directors and secretaries must be maintained by every company. Any change in the details contained in the register must be notified to the Registrar of Companies within 14 days.
The directors are required to make certain documents available for inspection by the members. These include:-
(i) register of members;
(ii) minutes of general meetings;
(iii) register of directors and secretaries;
(iv) directors' service contracts.
Every company must file with the Registrar of Companies an annual return signed by a director or the secretary. The return must be completed within a prescribed period and must be in a prescribed form.
(d) Loans and financial assistance
A company must not make loans to its directors or persons connected with them. A director who contravenes this section commits a criminal offence if the company is a public company or belongs to a group which includes a public company.
(e) Accounting responsibilities – Annual Financial Statements
The directors must ensure that the financial statements are laid open for inspection at the annual general meeting. The annual financial statements must consist of the balance sheet and the income statement. The directors must prepare annual accounts for the company's financial year and ensure that they are delivered and filed with to the Registrar of Companies within a prescribed period.
(f) General meetings
An annual general meeting ("AGM") must be held in each calendar year within 15 months of the last one. The duty to call an AGM lies with the directors and failure to do so leaves the company and every officer responsible liable to a fine.
An extraordinary general meeting ("EGM") is any general meeting other than the AGM. The directors are usually empowered to call an EGM for specific reasons (usually to obtain consent of the shareholders to carry out a specific act) and must do so at the request of the members.
Business cannot be transacted at a general meeting unless a quorum, as stipulated in the Articles is present.
(g) Board meetings
Apart from the requirement to keep minutes there are no statutory rules in relation to the calling and conduct of board meetings. In practice, large companies tend to retain a degree of formality while small private companies often dispense with formal meetings almost entirely.
Duties and liabilities of directors where financial position of the company is uncertain
Where a company's financial position is so uncertain that it is trading in insolvent circumstances or a winding-up is likely, then a director should be very careful about his activities. If, during the period leading up to the winding up of the company, a director acts improperly or recklessly he may incur a personal liability to contribute to the company's assets notwithstanding the fact that the company of which he is a director is a limited liability company. The circumstances in which this may happen are set out in the Insolvency Act 24 of 1936. Briefly, these circumstances are:-
- misfeasance by a director - which means that a director will be liable if he fails to perform one of his specific duties properly and as a result causes loss to the company;
- a director will be liable if he is shown to have carried on the company's business with the intention of defrauding creditors. Fraudulent trading is both a civil wrong and a criminal offence punishable under the Companies Act with imprisonment;
- wrongful trading where a director of a company which becomes insolvent, who knew or should have known that his company could not avoid becoming insolvent, may find that he is liable to contribute to the assets of the company. Liability can only be avoided if the director can satisfy the court that he took every step to minimize the potential loss to creditors.
It is therefore crucial that a director should recognize the moment when the company can no longer avoid insolvent liquidation and that he should take immediate and positive action to protect the interests of creditors. In taking such action, an objective level of skill will be expected of him. He will be expected to act not merely as a reasonable man, but as a skilled director.
Criminal and delictual liability
Section 332 of the Criminal Procedure Act 51 of 1977 creates potential liability for directors through offences committed by the company. A number of statutory provisions state that, where an offence has been committed by a company, with the consent or connivance of, or attributable to the neglect of, a director, such director may also be guilty of the offence. There are also a number of statutes which impose direct criminal liability. Furthermore, in certain instances, a cause of action may be construed against a director personally where he causes the company to commit a delict.
Those to whom a duty of care is owed
Directors are responsible to the company, not to the members. This responsibility extends to the interests of both present and future members of the company as a whole. Courts tend, therefore, only to interfere with the directors' decision if there is evidence that they acted in bad faith intending to prejudice the interests of some of the shareholders, or taking all the alternatives into account, no sensible board of directors could reasonably have come to the decision which the directors reached.
Statute supplements the common law to provide additional protection for minority shareholders. The Companies Act enables any member of a company to apply to the court for relief on the ground that the company's affairs are being or have been conducted in a manner unfairly prejudicial to the interests of one or more members. If the ground is made out, the court has a general power to grant whatever relief it thinks necessary.
Directors of holding companies should remember that their principal duty is owed to the company of which they are a director, and in the case of a subsidiary it means that it is owed to that subsidiary. If the individual concerned is a director or employee of the holding company as well as of the subsidiary, this means that he owes a similar duty to two principals.
Mitigation of liability arising from directors' duties
Insurance (for which the company may normally pay the premiums) is available for the liabilities that may arise from holding office as a director.
Power to bind the company – to manage the company
The Companies Act states that when a director deals with a third party, and the third party acts in good faith, the power of the director to bind the company is unlimited. Therefore, to all intents and purposes, the directors have the power to enter into contracts and agreements with third parties and the company will be bound by those contracts, even though the director in question may be acting outside the scope of his authority.
However, if a director does act outside the scope of his authority, he will be answerable to the company for those actions.
Limitations on directors' powers
Even though directors are not limited in their dealings with the outside world, their powers can be limited by the constitution (the Memoradum of Association and the Articles of Association) of the company. As stated above, these limitations will not affect third parties but may make the director responsible to the company for his actions.
The objects clause contained in the company's Memorandum of Association may limit the powers of the directors of the company. However, the members of the company may ratify any action of a director which exceeds his authority.
Limitations can be placed on the authority of the directors in the Articles of Association of the company. It is a duty of the directors, owed to the company, to remain within these limitations on their powers. In addition, the Companies Act operates to protect third parties dealing with the company and even though the directors act outside their authority their actions will be effective to bind the company.
It should be remembered that this note is only a brief guide to the extensive duties of directors. If you are in any doubt about the action you should take in any situation whether as a director or a member of a company you should take the appropriate professional advice.
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.