Directors' Liability and Duties

Applicable Legislation: The Companies Act 71 of 2008 - Sections 66 – 78

1. Definitions

The Companies Act 71 of 2008 (“Act”) defines a director as a - 

“member of the board of a company, as contemplated in section 66, or an alternate director of a company and includes any person occupying the position of a director or alternate director, by whatever name designated.”

According to sec 66 (1) - 

“The business and affairs of a company must be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions of the company, except to the extent that this Act or the company’s Memorandum of Incorporation provides otherwise.”

In addition to the above definitions, a director includes an ex officio director or a prescribed officer. An ex officio director means -

“a person who holds office as a director of a particular company solely as a consequence of that person holding some other office, title, designation or similar status specified in the company’s Memorandum of Incorporation.”

It therefore includes people who do not bear the title of director but are in a managerial position. A prescribed officer is -

“a person who, within a company, performs any function that has been designated by the Minister in terms of section 66 (10)”.

Examples of prescribed officers are senior managers. The Act therefore does not distinguish between executive and non-executive directors. The Act codifies directors’ duties to consist of a fiduciary duty of good faith and a duty of care and skill.

2. Duties

Prior to the introduction of the Act, the duties of company directors were governed by South African common law. This dictates that directors act in the utmost good faith and in the best interests of their companies and includes the need to exercise care, skill and diligence so as to promote company success through independent judgment.

Failure to properly perform the common law duties may render a director personally liable to pay monetary damages.

The Act now codifies the common law position and makes a few notable additions (which do not alter the common law position significantly). The Act extends the duties of directors and increases the accountability of directors to the shareholders of the company.

Section 76 of the Act addresses the standard of conduct expected from directors and extends it beyond the common law duty of directors by compelling them to act honestly, in good faith and in a manner they reasonably believe to be in the best interests of, and for the benefit of, their companies. Section 76(3) of the Act states that a director of a company, when acting in that capacity, 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 carrying out the same functions in relation to the company as carried out by that director, and 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; 
• has 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.

In further compliance with this section, the director is required to communicate to the board, at the earliest practicable opportunity, any material information that comes to his or her 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.

Section 72 of the Act entitles companies to appoint board committees and delegate to any committee any authority of the board. Such committees may include people who are not directors of the company, but they may not be ineligible or disqualified to be a company director and may not vote on any matter to be decided by the committee.

Board committees have the full authority of the board in respect of matters referred to them and may consult with or receive advice from any person. However, the creation of any committee and the delegation of any power do not by themselves satisfy or constitute compliance by a director with his or her duties as a director.

3. Liability

Section 77 of the Act prescribes certain statutory liabilities, which are placed on the directors of a company. In terms of section 77(2)(a) of the Act, 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 contemplated, inter alia, in section 76 of the Act.

Any action taken that directly or indirectly purports to relieve a director of liability is considered void. A director of a company will, in addition, be held liable where that director: 

• purports to bind the company or authorise the taking of any action by or on behalf of the company without the requisite authority; 
• acts in the name of the company in a way that is false or misleading; or 
• knowingly or recklessly signs or consents to the publication of a financial statement which is false or misleading.

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, in terms of section 77(6) of the Act, joint and several with any other person who is or may be held liable for the same act (which means that a single director can be held liable for the totality of damages suffered by a third party as a result of the breach of fiduciary duties).

Proceedings to recover any loss, damages or costs for which a person is or may be held liable in terms of section 77 of the Act may not be commenced more than three years after the act or omission that gave rise to that liability.

The Act further provides for the liability of directors, where they trade recklessly or conduct the company’s business with the intention of defrauding a creditor. Sub-sections 77(3)(b) and (c) of the Act state that any director of a company is liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director: 

• having acquiesced in the carrying on of the company’s business despite knowing that it was being conducted in a manner prohibited by section 22(1) of the Act; or 
• being party to an act or omission by the company despite knowing that the act or omission was calculated to defraud a creditor, employee or shareholder of the company or had another fraudulent purpose.

4. Conclusion

The new Act has effectively increased the duties of directors and extensively extended accountability for their actions. It is therefore of the utmost importance that directors, senior managers and shareholders fully acquaint themselves with all the provisions of the new Act and the King report III and that they review existing policies and ensure their compliance.