Can a director be held personally liable?

If someone accepts the role of director, they’ll be measured against a higher standard of skill and care and will become liable to the shareholders to perform their duties to the benefit of the company. This higher duty of care has also been transferred to prescribed officers and committees of the board of the company.

Who is a director in company law?

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 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)
  • Person who is a member of a committee of a board of a company or the audit committee of a company.

What can directors be held personally liable for?

  • The actions of his co-directors or actions of his appointed board committee
  • The breach of a fiduciary duty in terms of common law principles, including principles of delict in terms of the Act.
  • Failing to, amongst others, vote against a distribution for the benefit of a co-director if the company won’t be able to satisfy the solvency and liquidity test immediately after the distribution has been made. 
  • A passive director will attract liability if he doesn’t vote against a distribution in such circumstances. 

Furthermore, 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. 

To avoid this scenario, it’s advisable to purchase liability insurance as permitted by the Act and, if required to, in terms of a company’s MOI. 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 should be pointed out that insurance can’t 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.

Additional director duties:

A company may specify an additional set of measurements for directors in the company’s Memorandum of Incorporation (MOI) that’s specific to the company’s operational requirements. This is an important instrument and 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.

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.

 

View the full Companies Act, No.71 of 2008

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