In this article we will summarise the main provisions of the Act in relation to the responsibilities of directors, instances where directors may incur personal liability and what steps a director can take to ensure he/she meets their obligations in terms of the Act. The intention is not to delve deeply into each section, but to provide a brief overview with references to the relevant sections of the Act to enable further study where needed.Who is considered a director?
When referring to directors, the Act also includes alternate directors, prescribed officers, members of board committees (even if they are not board members), and members of the audit committee within the scope of being a director.
Regulation 38 clarifies the meaning of prescribed officers – this effectively refers to an individual who, although not being appointed as a director
of a company, exercises 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 the activities of the company. For example, the financial manager of a private company could, in certain circumstances, be deemed to be a prescribed officer. Standards of directors’ conduct – Section 76
The Act codified the standard of conduct expected from directors and extends beyond the common law duty of directors with section 76(3) stating that a director must exercise the powers and perform the functions of a director:
- in good faith and for a proper purpose;
- in the best interests of the company; and
- with the degree of care, skill and diligence that may reasonably be expected of a person having the general knowledge, skill and experience of that director.
Section 76(4) of the Act states that in respect of any matter arising in the exercise of the powers or the performance of the functions of a director, a director will have satisfied the obligations in section 76(3) of the Act, if the director:
- has taken reasonably diligent steps to become informed about the matter (a director is entitled to rely on the performance of employees, committees, legal counsel, accountants or other professionals);
- either had no material personal financial interest in the subject matter or complied with the requirements of section 75 (dealt with below); and
- made a decision, or supported the decision of a committee or the board with regard to that matter; and had a rational basis for believing, and did believe, that the decision was in the best interests of the company.
Furthermore, in terms of section 76(2) the director is required to communicate to the board, at the earliest practicable opportunity, any material information related to the subject matter that comes to the director’s attention, unless he or she reasonably believes that the information is publicly available or known to the other directors or is bound by a legal or ethical obligation of confidentiality.Directors’ personal financial interests – Section 75
Section 75(5) stipulates that if a director has a personal financial interest in respect of a matter considered at a board meeting, the director:
- must disclose the interest and its general nature;
- must disclose any material information relating to the matter;
- may disclose observations or insights if requested to do so by the other directors;
- must leave the meeting immediately after making disclosure;
- must not take part in the consideration of the matter; and
- must not execute any document on behalf of the company in relation to the matter unless specifically requested to do so by the board.
The Act contemplates that non-disclosure by a director renders any decision made by the board in relation to the matter invalid. The decision can however be validated if ratified by an ordinary resolution of shareholders following disclosure of the interest or can be declared valid by the court.
Directors who fail to make proper disclosure of personal financial interests may incur personal liability from shareholders (section 20(6)); the company (section 77(3)) or third parties (section 218(2)). Personal liability of directors is discussed in further detail below.Liability of directors – Sections 20, 77 and 218 Liability towards shareholders:
Section 20(6) provides for each shareholder to have a claim for damages against any person (thus including directors) who intentionally, fraudulently or due to gross negligence causes the company to do anything inconsistent with the Act or any limitation, restriction or qualification set out in the company’s Memorandum of Incorporation.
Furthermore, directors are specifically excluded in section 20(7) from the protection offered to third parties dealing with a company in good faith. This is expanded on below.Liability towards the company:
Section 77 prescribes certain statutory liabilities, which are placed on the directors of a company. In terms of section 77(2), a director of a company may be held liable (in accordance with the principles of the common law relating to the breach of a fiduciary duty) for any loss, damages or costs sustained by the company as a consequence of any breach by the director of the duties specifically contemplated in section 76(3)(c), any other provision of the Act and any provision of the company’s Memorandum of Incorporation.
A director is held liable in terms of section 77(3) for any loss, damages or costs sustained by the company as a consequence of the director having:
- acted in the name of the company, signed any document on behalf of the company or purported to bind the company or authorise the taking of any action by the company despite lacking the required authority to do so;
- carrying on of the company’s business despite knowing that it was conducted recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose;
- been a party to an act or omission by the company despite knowing that it had a fraudulent purpose;
- knowingly or recklessly signed or consented to the publication of a financial statement or prospectus which is false or misleading; and
- failed to participate in board meetings and vote in accordance with the requirements of the Act.
Such a director is held personally liable to the company (and to any other affected person) for any consequential loss suffered by the company or such person.
The liability of a director is joint and several with any other person who is or may be held liable for the same act.Liability towards third parties:
Section 20(7) provides that any person (other than a director) dealing with a company in good faith is entitled to presume that the company, in making any decision in the exercise of its powers, has complied with all the formal and procedural requirements of the Act, the Memorandum of Incorporation and the rules of the company, unless the person knew or reasonably ought to have known of any failure to do so.
Section 218(2) stipulates that any person (thus including directors) who contravenes any provision of the Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.
Therefore, if a third party deals with a company in good faith, and a director of that company has not complied with the requirements of the Act, the third party (or the company) could hold the director liable for any loss or damage suffered as a result.How can directors protect themselves against personal liability?
Section 78(2) of the Act provides that any provision of an agreement, other than as provided for in sections 78(4)-(6) dealt with below, the Memorandum of Incorporation or rules of a company, or a resolution adopted by a company, which aims to relieve a director of any duty or liability, or negate, limit or restrict any legal consequences arising from an act or omission that constitutes wilful misconduct or wilful breach of trust on the part of the director, is void.
However (and except to the extent that the Memorandum of Incorporation of a company provides otherwise), a company may, in terms of sections 78(5) and 78(6), indemnify a director in respect of any liability arising other than:
- where a director acted recklessly, or despite knowing he or she lacked authority, or with the intent to defraud creditors, or with any other fraudulent purpose;
- from wilful misconduct or wilful breach of trust on the part of the director; or
- if a fine has been imposed as a consequence of a director having been convicted of an offence.
The company may also in terms of section 78(4) and subject to its Memorandum of Incorporation:
- advance expenses to a director to defend litigation in any proceedings arising out of the director’s service to the company; and
- indemnify a director for expenses incurred, or to be incurred, for such litigation if such litigation is abandoned, or which exculpates the director, or which arises in respect of any liability for which the company may indemnify the director.
Section 78(7) of the Act provides further, that a company may (subject to its Memorandum of Incorporation) purchase insurance to protect:
- a director against liability or expenses for which it is permitted to indemnify a director; and
- the company against any liability for which the company is permitted to indemnify a director, or any contingency including any expenses it is permitted to advance in respect of the defending of litigation by a director, or to indemnify a director for such expenses.
In this article we have briefly dealt with the main sections of the Act setting out the responsibilities of directors, potential liabilities that can be incurred and how directors can best ensure compliance. At Meredith Harington we pride ourselves on keeping our client’s interest at heart and would welcome the opportunity to discuss any concerns you may have, and how we can be of assistance, in meeting your responsibilities as director.