The Companies Act, No. 71 of 2008 (“the Act”) commenced on 1 May 2011 and introduced a number of strenuous provisions that directors may be blissfully unaware of. One such provision is the extended director’s liability. Directors may unknowingly find themselves in a situation where the separated personality of the company does not offer them the protection against personal liability as intended with the incorporation of the entity.
A director is not restricted to directors and alternate directors as defined the in Companies Act, No.61 of 73. The definition of a director has been extended by the Act and now, inter alia, includes the following persons: alternative director; prescribed officer (person who regularly has material participation in exercising general executive control over and management of the whole, or a significant portion, of the business and activities of the company); a person who is a member of a committee of a board of a company or of the audit committee of a company.
If a person accepts his appointment as a director he will be measured against a higher standard of skill and care and will become liable to the shareholders to perform his duties to the benefit of the company. The higher duty of care has also been transferred to prescribed officers and committees of the board of the company.
Directors remain liable for the breach of a fiduciary duty in terms of common law principles, including principles of delict in terms of the Act. A company may specify an additional set of measurements for directors in the company’s Memorandum of Incorporation (“MOI”) that is specific to the company’s operational requirements. This is an important instrument that allows shareholders to call on a director to fulfil his duties in correlation with predefined measurements, not hoping that the broadly defined fiduciary duty would cover intended measurements.
A director that breaches his duties may be held liable by the company for loss, damage and costs sustained by the company jointly and severally with other liable directors. A director may thus be personally liable for the actions of his co-directors or actions of his appointed board committee. This has the effect that a director may literally end up paying for someone else’s negligence. To avoid this scenario it is advisable to purchase liability insurance as permitted by the Act and if required to in terms of a company’s MOI. It should be pointed out that insurance cannot allow protection in instances where wilful misconduct exist, a director acts on behalf of the company knowing that he lacks the authority to do so and a director acted, or omitted to act, and such act or omission was calculated to defraud the company.
Directors may also attract liability where they fail to, inter alia, vote against a distribution for the benefit of a co-director if the company will not be able to satisfy the solvency and liquidity test immediately after the distribution has been made. A passive director will attract liability if he does not vote against a distribution in such circumstances. In this regard it would be in the best interest of the company and directors to keep a complete record of minutes passed and signed agendas of directors’ meetings for evidentiary purposes (this is also a requirement in terms of the Act).
It is clear that the legislature has set its sights on poorly run companies and, if such entities go belly up, the directors may not be able to hide behind an empty shell.
Barnard Incorporated is a firm of attorneys situated in Centurion, Pretoria.