Serving as a director of a company, be it a JSE-listed group or a small family-owned business, brings with it several onerous responsibilities.
How directors could be held liable
Professor MF Cassim of the School of Company Law at The University of Pretoria, in a recent article published in BizCommunity.com, briefly outlined the ways in which directors can be held liable:
- Firstly, the directors can be held personally liable for any losses or debts sustained by a company as a consequence of their reckless trading.
- The second way in which directors can be held accountable is by having criminal charges laid against them for fraudulent trading under the Companies Act.
- Thirdly, the Companies Act requires the court to declare directors delinquent if they trade recklessly or fraudulently.
- Fourthly, creditors can hold the board of directors personally responsible for the company’s debts.
Several important areas are relevant, namely:
- The reckless or fraudulent trading by the company;
- Fraudulent trading occurs when either entity continues to trade and to incur debt when the boards knew, or should reasonably have known, that it is unlikely to be able to repay its debts. This is both civil matter and a criminal office.
- Reckless trading occurs when the boards knew, or should reasonably have known, that the company would be unable to pay or settle its debts. This is a civil matter.
- The standard of conduct of a director;
- His/her fiduciary duties; and
- The risk of being classified as a delinquent director.
The Companies Act prohibits reckless trading per Section 22 as follows:
(1) A company must not carry on its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose.
The Companies Act defines the standards of conduct of a director as follows:
Section 76(3) – a director of a company, when acting in that capacity, must exercise the powers and perform the functions of director-
(a) in good faith and for a proper purpose;
(b) in the best interests of the company; and
(c) with the degree of care, skill and diligence that may reasonably be expected of a person-
(i) carrying out the same functions in relation to the company as those carried out by that director; and
(ii) having the general knowledge, skill and experience of that director.
A fiduciary duty is an obligation to act in the best interests of another party. A director thus has a fiduciary duty to act in the best interests of the company on whose board he/she serves.
A breach of fiduciary duties occurs if a fiduciary behaves in a manner that runs counter to these duties, or omits to adhere to some, resulting in legal implications.
A director may be held personally liable for a breach of his/her fiduciary duties on the basis that an affected party, including the company itself, could aim to recover actual damages suffered.
It is also easier to prove a breach of fiduciary duty compared to the need to prove fraudulent or criminal intent on the part of the director.
No single source exists that outlines the duties of a director. References to these duties can be found in the following documents, amongst others:
- The Companies Act;
- Memorandum of Incorporation of the Company;
- Rules of the Company;
- King IV Report on Corporate Governance;
- JSE Listings Regulations;
- Other Acts and Regulations applicable under specific circumstances; and
- Common law.
These are usually augmented at company level by the following:
- Letter of appointment;
- Service level agreement; and
- Board and Committee Charters.
Generally speaking, six pillars of fiduciary duties can be identified from the above, namely for a director to:
- Exercise reasonable care, skill and diligence;
- Devote reasonable time to the affairs of the company;
- Make informed decisions;
- Honestly apply their minds to all matters at hand;
- Ensure that board resolutions are diligently carried out and implemented.
- Act in the best interests of the company;
- Exercising due care over and safeguarding of the assets of the company;
- Not to disclose or use information not available to the general public.
- Act within their powers and for a proper purpose;
- Apply independent and unbiased judgement;
- Avoid conflicts of interest;
- Disclose possible conflicts of interest;
- Recusal when such matters are discussed;
- Must not compete with the company in any way.
- Not to unduly benefit from the position of director.
The Companies Act defines the parameters that would apply in the case of a delinquent director as follows:
Section 162(5) – a court must make an order declaring a person to be a delinquent director if the person-
(c)(iii) – intentionally, or by gross negligence, inflicted harm upon the company or a subsidiary of the company;
(c)(iv) – acted in a manner-
(aa) that amounted to gross negligence, wilful misconduct or breach of trust in relation to the performance of the director’s functions within, and duties to, the company.
The Companies Act specifically provides for the liability of directors as follows:
Section77(2) – A director of a company may be held liable-
(a) in accordance with the principles of the common law relating to 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 a duty contemplated in section 75, 76(2) or 76(3)(a) or (b); or
(b) in accordance with the principles of the common law relating to delict for any loss, damages or costs sustained by the company as a consequence of any breach by the director of-
(i) a duty contemplated in section 76(3)(c);
(ii) any provision of this Act not otherwise mentioned in this section; or
(iii) any provision of the company’s Memorandum of Incorporation.
We have assisted the boards of several clients to be mindful of the fiduciary risks and responsibilities they carry and implemented a review process as part of their corporate governance framework.
We can also do it for you. Call us for more details.