Directors’ Liabilities – A Different Dimension
by Bilal Jhetam on 19/09/12 at 6:37 am
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The personal liability of South African directors is not only a much conversed subject but also an important one. The new Companies Act No. 71 of 2008(“The Act”) has a significant impact on directors’ liability.
By accepting the appointment as a director, you agree in principle to carry out your duties as a director according to certain standards. Section 76 of The Act prescribes the Standard of Directors’ Conduct. It encourages directors to be responsible and accountable for their actions.These duties imposed under Section 76 are in addition to the duties of the director of a company under the common law. The Act makes no distinction between executive, non-executive and independent non-executive directors and therefore applies to all directors.
The Act requires that a director must exercise the powers and perform the functions of a director in good faith and for a proper purpose; act in the best interest of the company and with the degree of care, skill and diligence that is reasonably expected. The Act also provides that directors may only use their position, or any information which they become aware of whilst holding that position, to the advantage of the company. They are therefore prohibited from any personal gain or to knowingly causing harm to the company.
One of the fundamental duties of a director is to avoid any possible conflict of interests with the company. Section 75 stipulates that where a director has a conflicting personal financial interest in respect of a matter to be considered at a meeting of the board, he or she is prohibited from making, participating in the making of, influencing, or attempting to influence any decision in relation to that particular matter. In addition, he or she has to declare that personal interest and immediately leave the meeting and is prohibited from executing any document on behalf of the company in relation to the matter, unless specifically requested to do so by the board.
It is important that all directors comply with the conflict of interest declaration provisions, as non-compliance may render certain transactions and agreements void. Individuals who are appointed as directors must be fully aware of the duties and responsibilities as specified in The Act as they may find themselves being brought to answer in a court. Section 77 in the Act is very detailed as to the circumstances under which directors would be called to account, including the director having:
- Acted in the name of the company, signed anything on behalf of the company or proceed to bind the company or authorize the taking of any action by or on behalf of the company, despite knowing that the director lacked the authority to do so;
- Consented in the carrying on of the company’s business, despite knowing that it amounted to reckless trading;
- Been a party to an action or failure to act, despite knowing that the act or omission was calculated to defraud a creditor, employee or shareholder of the company;
- Signed, consented to, or authorized the publication of any financial statements that were false or misleading, or a prospectus that contained false or misleading information; or
- Been present at a meeting, or participated in the making of a decision, and failed to vote against certain wrongful actions, for instance the issue of any unauthorized shares or securities.
A director is jointly and severally liable with any other person who is or may be held liable for the same act. Proceedings to recover any loss or damages, for which a director may be held liable, may commence within a period of three years after the act or omission that gave rise to that liability.
Section 162(5) of The Act states that a director may be declared “delinquent” as a result of certain actions, including the director:
- consented to serve as director, or acted as director while ineligible or disqualified;
- whilst holding the position of director-
- grossly abused the position of director;
- took personal advantage of information;
- intentionally or by gross negligence inflicted harm on the company or subsidiary of the company;
- acted in a manner that amounted to gross negligence, wilful misconduct or breach of trust in relation to the performing of duties;
- had repeatedly been personally subject to a compliance notice in terms of any legislation;
- had at least twice been personally convicted of an offence or required to pay an administrative fine;
- within a period of five years was a director or a managing member of a company or close corporation that was convicted of an offence or subject to an administrative fine in terms of any legislation and the person was a director or managing member and the court was satisfied that the declaration of delinquency was justified;
From the above it is clear that the new Companies Act 71 of 2008 sets the bar for directors conduct very high and that any contravention will be seen in a serious light.
Directors need to make sure that they are aware of their responsibilities in terms of The Act and particularly in regard to the potential exposure to directors’ liability whilst sitting on the boards of companies.
Bilal is CA (SA) and a partner at NexiaSAB&T. He has been with Nexia SAB&T for 10 years in total. He has also been a director at Business innovation Group which is a subsidiary of Simeka Business Group Ltd. Bilal is responsible for the Southern Region Consulting and Internal Audit division at Nexia SAB&T. He has experience from a broad client base ranging from listed companies to public sector entities. He sits on the board and audit committee of a number of companies and NPO’s such as the Cape Chamber of Commerce. Besides the governance environment Bilal’s other focus is Due Diligence investigations and Business valuations. He also sits on the Nexia International – valuations committee. Contact Bilal on bilalj@nexia-sabt.co.za or visit Nexia SAB&T's website at www.nexia-sabt.co.za View more articles by Bilal Jhetam.
Tags: Corporate Governance
