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Directors of companies: responsibilities and liability

22 Jun 2011

Willie SmithThe new Companies Act, effective from 1 May, will undoubtedly have significant consequences for all stakeholders and directors of companies.

While the new Companies Act of 2008 aims to provide a flexible regime that balances accountability and transparency, with less of a regulatory burden, one aspect of the Act (No 71 of 2008) is that it records the common law duties and responsibilities of directors and provides clarity in the performance of the obligations.

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.

The Act also encourages the efficient and responsible management of companies and refers to 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 of 2008.

The 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.

Included in the directors’ responsibilities and liability consequences are:

GENERAL RESPONSIBILITIES OF THE BOARD OF DIRECTOR'S INCLUDE:

  • overseeing control and accountability;
  • developing strategy and performance objectives;
  • overseeing systems of risk management and internal compliance and control, codes of conduct and legal compliance;
  • monitoring management’s performance and implementation of strategies and ensuring appropriate resources are available;
  • approving and monitoring the progress of major capital expenditure, capital management and acquisitions and divestments;
  • approving and monitoring financial and other reporting; and
  • overseeing board appointments and removals, and succession planning.

DIRECTORS’ RESPONSIBILITIES UNDER THE COMPANIES ACT OF 1973 HAVE BEEN:

  • The rights and obligations of a director have been imposed by the Companies Act of 1973, the Articles of Association of a company and common law; and
  • 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.

DIRECTORS’ RESPONSIBILITIES UNDER THE (NEW) COMPANIES ACT OF 2008:

Core duties (Section 76 of the Act):

  • Disclose any conflict of interest (Section 75)
  • Use position and information for company’s benefit
  • Disclosure of material information
  • Perform duties in good faith, in the best interest of the company and with care, skill and diligence that may reasonably be expected of a person carrying out such functions and having the same skill and experience of that director (i.e. the reasonable man/woman test)

Strategy and corporate structure:

  • Duty to comply with the Act in relation to different types of companies (Section 8)
  • Duty to comply with the company’s memorandum of incorporation (Section 13)
  • Duty to manage the business affairs at the company (Section 66(1))
  • Duty to carry on the business without trading recklessly or under insolvent conditions (Section 22)

Board structure and corporate administration:

  • Duty to appoint board committees (Section 72)
  • Duty to appoint an audit committee (Section 94) – only applicable in certain instances
  • Duty to appoint a company secretary (Section 84 & 86) – only applicable in certain instances
  • Duty to call and convene shareholder’s meeting (Section 61)
  • Duty to call and convene directors’ meetings (Section 73)

Accountability and assurance:

  • Duty to keep company records (Section )
  • Duty to keep accounting records (Section 28)
  • Duty to comply with Chapter 3 of the Act (Section 34(1) & 94)
  • Duty to pay directors’ remuneration in terms of memorandum of incorporation and get it approved by shareholders by special resolution (Section 66 (8) & 66(9))
  • Duty to appoint auditors (Section 90 & 92) – only applicable in certain instances.
  • Duty to obtain an independent review of the financial statements

Disclosure and transparency:

  • Duty to prepare annual financial statements (Section 29 & 30)
  • Duty to prepare a directors’ report (Section 30(3))
  • Duty to issue a prospectus (Section 100)
  • Duty to disclose directors’ remuneration information (Section 30)
  • Duty to file an annual return (Section 33)

Shareholder treatment:

  • Duty to ensure that shareholders can exercise their voting power and rights (Section 2(2) & 58)
  • Duty to facilitate a shareholders’ meeting (Section 61)
  • Duty to operate within the framework of the company’s Memorandum of Incorporation (Section 15(3) & (4) & 36)
  • Duty to operate in the best interests of the shareholders (Section 20(6) & (7) & 76(3))

THE LIABILITY OF DIRECTORS IN TERMS OF THE 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 three years after the deed has taken place):

  • in terms of the principles of common law or the provisions of the law of delict relating to the breach of fiduciary duties;
  • where a director acted in the name of the company or signed anything on behalf of the company whilst the director knew he or she lacked the necessary authority;
  • the director conducted the company’s business in contravention of the provisions in the Act relating to pre-incorporation contracts;
  • the director is a 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;
  • the director signed, consented to, or authorized the publication of any financial statements that were false or misleading in any material respect;
  • the director signed, consented to or authorised, the publication of a written statement that contained “untrue statements” or a statement to the effect that a person had consented to be a director of the company, when no such consent had been given, despite knowing that the statement was false, misleading or untrue; and
  • where the director was present at a meeting or participated in making a decision at a meeting where there was non-compliance with the formalities prescribed in the Act.

INDEMNIFICATION OF DIRECTORS IN TERMS OF THE 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 Act, indemnity also applies to former directors of the company and allows for restitution claims from directors.

Indemnification is not allowed in the following situations:

  • 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;
  • where the director consented to carry on the business of the company despite the business being insolvent;
  • where an intent to defraud an employee or creditor and relied on any act or omission connected thereto;
  • wilful misconduct or wilful breach of trust; or
  • the director is liable for an offence or fine in terms of national legislation.

In light of the above the people responsible for governance in companies need to ask the following key questions:

  • Am I complying with my common law and statutory duties as set out above?
  • Are there any provisions in the memorandum or articles of association which impose additional duties on me?
  • Is there a conflict of any nature between my interests and those of the company?
  • Am I sure that contracts I enter into on behalf of the company are within the scope of the memorandum and articles of association?
  • Has the company taken out directors’ and officers’ liability insurance and am I sure I understand the conditions under which I am indemnified?
  • Do I need to seek independent professional advice to enable me to better understand my role and duties as a director?

For more information contact the author of this article, Willie Smith of Tenk Loubser & Associates, on tel. 021 915 6666 or e-mail willie@exceed.co.za

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