South Africa: Directors Responsibilities - Any Need To Sweat?

Last Updated: 19 October 2009
Article by Stephen Kennedy-Good

It has been suggested that provisions of the new Companies Act may trigger flight from boardrooms because careless behaviour could have catastrophic implications not only for the company, as seen in the collapse of Enron, Leisurenet and the like, but also for directors personally.

An interesting innovation of the new Act, which could come into effect in 2010, is that the duties of directors are partially spelt out. This is a recent development as the 1973 Companies Act does not contain clear guidance regarding the duties and liabilities of directors, with the result that these issues are presently governed by the common law and codes of good corporate practice. The new provisions have been subject to much public comment and concern as some feel that they will be overly burdensome for directors with the result that few would be prepared to accept the position of director. These worries are not well founded, as the Act merely records existing common law duties of directors and stipulates that its provisions be interpreted in accordance with our existing law. The result is a partial codification of our existing law, allowing some room for the development of the law by our courts.

Take the recent Supreme Court of Appeal decision in Da Silva v CH Chemicals (Pty) Ltd as an example. In this case, CH Chemicals sued Da Silva for the disgorgement of profits, alternatively for the payment of damages arising from alleged breaches of his duties as managing director. The court referred to the well known rules of company law that directors have a fiduciary duty to exercise their powers in good faith, in the best interests of the company and that they cannot make a secret profit or place themselves in a position where their duties to the company conflict with their personal interests. If one looks at section 76 of the new Act, it will be seen that its provisions provide for precisely that. Section 76(3) provides that a director of a company must exercise his powers and functions "in good faith and for a proper purpose" and "in the best interests of the company". Also, section 76(2)(b) compels a director to communicate all material information relating to the company to the board at the earliest opportunity, save for instances in which the information is immaterial, available to the public or where an obligation of confidentiality prevents him from disclosing such information. These provisions are in line with the principles restated in Da Silva and cases such as this will be considered in future to give content to the meaning of the new law.

The Act also includes the so-called "business judgment rule", which was founded more than 170 years ago in America and has the effect of curbing liability. The rule entails that a director should not be held liable for decisions that lead to undesirable commercial results, where such decisions were made in good faith, with care and on an informed basis, which the director believed was in the interest of the company. It also provides that a director may rely on information provided by company employees and other experts retained by the company. The objectives of the rule in the American context is to limit litigation and judicial second guessing of decisions taken in the private business sector, allowing the company to determine its appetite for risk. It will be interesting to see what effect it has in South Africa.

In regard to liability generally, section 77 provides that a director could be held liable for damages or costs sustained by the company in accordance with the principles of the common law or the law of delict relating to breach of fiduciary duties. Section 78 provides that companies will be able to take out indemnity insurance to protect a director against any expense or liability for which the company is allowed to indemnify its directors. A company may also take out insurance in its own favour against any expenses that the company may advance to one of its directors or for which the company is permitted to indemnify a director. These indemnity provisions are broader and clearer than they have ever been. There are however a number of instances in which a company cannot indemnify a director which include, for example, fraudulent conduct or circumstances in which a director took action purportedly on behalf of the company whilst knowing that he was not authorised to do so. Not surprisingly, a company will not be allowed to pay any fine imposed on one of its directors as a result of being convicted of contravening the laws of our country.

These changes are positive and in line with international trends. Directors will be able to seek guidance directly from the Act. Obviously, appropriate advice will still need to be sought to interpret the provisions against the backdrop of our common law and the facts at hand. The new King III report on corporate governance, which was released at the beginning of September 2009, will also be a helpful guide to those directors who wish to ensure that they are walking a straight line in the right direction. In fact, the report identifies both the duty to act in the best interest of the company and the over-arching importance of managing conflicts of interest.

A less encouraging development that does not emanate from the Companies Act, but is of interest to directors and could change the rules of the directorship game, is the Competition Amendment Act, which was signed into law at the end of August, but is yet to come into effect. In terms of the amendments to our competition laws, fines of up to R500 000 or prison sentences of up to 10 years, or both, may be imposed on directors of companies who are responsible for, or knowingly acquiesce in, fixing of prices and trading conditions, market division or collusive tendering. Fines of this nature will apply to directors personally and the company concerned will not be allowed to foot the bill. It is yet to be seen whether these proposals will be subject to constitutional scrutiny. But whether there is personal liability or not, directors should ensure that competition audits and training are done to ensure compliance and that all potentially anticompetitive or collusive conduct is entirely avoided.

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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