Companies Act 2008 – Directors’ Responsibilities and Liability
Do you still want to be a director under the new Companies Act? Directors’ need to know their rights and must be aware of what is expected of them. They are subjected to the common law, as found in court rulings and judgments.
The new Companies Act 2008, became effective on the 1st of May, after numerous changes and delays, 4 days after the act was published in the Government Gazette, and will no doubt, have significant consequences for all stakeholders and directors’ of companies.
A director means a member of a 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.
While the new Companies Act, 2008 aims to provide a flexible regime that balances accountability and transparency, with less of a regulatory burden, as one aspect of the new Companies Act (No 71 of 2008) is that it records the common law duties and responsibilities of directors, which provides clarity in the performance of the obligations.
In addition to encourage entrepreneurship and high standards of corporate governance, amongst others, it is a purpose of the new Act to balance the rights and obligations of shareholders (members) and directors, and to also encourage the efficient and responsible management of a company. In terms of the New Act a company’s governing document is the Memorandum of Incorporation (no longer referred to as the memorandum and articles of association).
The Memorandum of Incorporation should serve as a higher standard than legislation and should allow for smoother governance processes. It is intended that the Memorandum of Incorporation be binding between the company and each director or member of the company. This document may only be amended in terms of a court order or by virtue of a special resolution or in accordance with section 36(3) & (4) of the Companies Act, 2008.
The new Companies Act provides for the business and affairs of a company to be managed by, or under, the direction of its board. The board has the authority to perform any of the functions of the company except to the extent that the new Companies Act or Memorandum of Incorporation provides otherwise.
Some of the directors’ responsibilities and liability consequences we need to be aware of, but is not limited to, are:
1. General responsibilities of the board of directors’ include:
1.1. oversight of control and accountability;
1.2. development of strategy and performance objectives;
1.3. systems of risk management and internal compliance and control, codes of conduct and legal compliance;
1.4. monitoring management’s performance and implementation of strategies and ensuring appropriate resources are available;
1.5. approving and monitoring the progress of major capital expenditure, capital management and acquisitions and divestments;
1.6. approving and monitoring financial and other reporting; and
1.7. board appointments, removals and succession planning.
2. Directors’ responsibilities under the current Companies Act 1973 (“the Current Act”)
2.1. presently the rights and obligations of a director are imposed by the Current Act, the Articles of Association of a company and common law; and
2.2. a director is required to act in good faith, act independently with the degree of care, diligence and skill, that may reasonably be expected from a person of his/her knowledge and experience, within the scope of authority as prescribed by the Memorandum and Articles of Association of the company and as a member of the board.
3. Directors’ responsibilities under the Companies Act 2008 (“the New Act”):
3.1 The core duties – Section 76 of the Act:
– In good faith
– In best interest of the company
– With care, skill and diligence
3.2 Strategy and corporate structure:
3.3 Board Structure and corporate administration :
3.4 Accountability and Assurance:
3.5 Disclosure and Transparency:
3.6 Shareholder Treatment:
Liability of directors in terms of the New Act is as follows:
A company may recover losses, damages or costs sustained by the company from the directors in, inter alia, the following circumstances (limited to 3 years after the deed has taken place):
Indemnification of directors in terms of the New Act:
A company is entitled to take out indemnity insurance to protect a director (barring the situation where the director is convicted of an offence) so far as they are allowed to indemnify the director, the company may also indemnify itself against expenses advanced to a director in terms of such indemnity and accordingly in terms of Section 78 of the New Act, indemnity also applies to former directors of the company and allows for restitution claims from directors.
the director acted in the name of the company and signed on behalf of the company and purported to bind the company without the necessary authority;
In light of the above the people responsible with governance in companies need to ask the following key questions:
For more information, please contact the writer of this article, Willie Smith, Tenk Loubser & Associates, on tel. 021 9156666 or e-mail firstname.lastname@example.org.