The responsibilities of directors under the New Companies Act of 2008 can weigh heavily on the shoulders of persons in such positions, says law firm Eversheds candidate attorney David Luckett. A director is now liable for any loss, damage or costs sustained by the company as a direct or indirect result of the director having acted without the necessary authority, carried out the business recklessly or committed fraudulent acts.
“The responsibilities of directors under the new law extend to alternate directors, prescribed officers and committee members, irrespective of whether they are members of the company’s board,” explains Luckett and colleague candidate attorney Kelly Kramer.
The duties of directors are primarily determined by common law. The new Act sees the partial codification of the common law duties of directors and has resulted in the tightening up of directors’ duties and liabilities.
“It is apparent that the poten- tial liabilities associated with being a director easily outweigh the lifestyle, owing to stricter personal legal liabili- ties towards the company,” notes Luckett.
Besides the duties imposed on directors in terms of the new Act, a director is, under common law, subject to fiduciary duties requiring him or her to exercise powers in good faith, with honesty and loyalty and for the benefit of the company.
Directors also have a duty to exercise reasonable care and skill when carrying out their duties by making educated, informed and wise decisions in the best interests of the company and its employees. However, the provisions in the new Act have never been codified under South African legislation, until now, and they do not replace the common law duties of directors. The codified provisions, in terms of the new Act, govern directors’ conduct only from May 1.
Luckett and Kramer explain that directors’ fiduciary duties confer a statutory power and duty on them to manage the business of the company. This power comes from a statute and not the Memorandum of Incorporation of the company, so it is subject to shareholder control to a lesser extent than before.
“A director stands from the time of his appointment or, if not formally appointed, from the time he starts to act as such in a fiduciary relationship to the company, which arises from the purpose for which a director is entrusted with his office and for which he and his codirectors are entrusted with their powers to manage the affairs of the company,” says Kramer.
Directors, therefore, owe duties to the company and cannot divest themselves of, nor be exempted from, their fiduciary duties.
In this fiduciary capacity, a director assumes two roles: first, as an agent acting on behalf of the company and, second, as a trustee who controls company assets.
Meanwhile, codification of the common law duties of directors takes place under Section 76 of the new Act.
“A director must exercise his powers in good faith and for a proper purpose. That exercise must be in the com- pany’s best interests and with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions as those of the director, who has the general knowledge, skill and experience of that director. Further, a director must not use his or her position or any information gleaned while acting as a director to gain any advantage for anyone other than the company or a wholly owned subsidiary of the company, or to knowingly cause harm to the company or a subsidiary of the company,” explains Kramer.
This section of the Act also introduces the business judgment rule, which provides that, in taking a decision, a director will satisfy his or her statutory duties, but not necessarily his or her common law duties, if the director took reasonable steps to become informed about the matter and, in addition, has no material financial interest in the matter, has disclosed such interest, or rationally believed the decision was in the best interests of the company.
Further, directors must not place themselves in a situation where their personal interests would conflict with those of the company. A director is required to disclose any direct material personal financial interest that he or she or a related person has in respect of a matter. This provision does not alter the position under the old Act.
On the other hand, except for wilful misconduct or a breach of trust, a court of law may relieve one or more directors, wholly or partly, from any liability if it appears that the director/s has/have acted honestly and reasonably.
Further, it must be noted that a director of a subsidiary company does not owe any fiduciary duty to its parent or holding company or the group of companies to which the subsidiary forms a part, and the director of a holding company does not owe any fiduciary duties to a subsidiary either.
“Under common law, each company in a group of com-panies is regarded as a separate legal entity with its own rights and liabilities, unless the court decides to pierce the corporate personality of one or more of them,” explains Kramer.
Criminal liability is covered under sections 213 to 217 of the new Act and deals with criminal liability in more detail than the old Act.
“Previously, it was a criminal offence to knowingly carry on the business of a company recklessly, or with the intent to defraud creditors. If this were to happen now, a creditor of the company would also have had a civil claim against a director for any losses suffered by that creditor,” says Kramer.
Further, Luckett adds that, under the new Act, directors can be held civilly liable in terms of Section 76(2) for breaches of, besides others, the provisions of sections 76 and 77(3), but only insofar as such conduct harms the company.
“It does not provide a right for a creditor who has suffered loss to sue a director; however, any person who contravenes any provision of the Act is liable to any other person for loss caused to that person as a result of such contravention. Therefore, a creditor would probably be able to sue a director in terms of this provision,” says Luckett.
Kramer states that although the new Act increases the number of duties and the potential liabilities of directors, it also provides a degree of clarity regarding the conduct expected of someone accepting the position of a director.
In addition, a director can find comfort in the fact that, if he or she operates with honesty, integrity, competence and expertise, the new direction adopted by the Act will be very much to the benefit of both themselves and the companies they direct.