Directors Liability not to be taken lightly

The new Companies Act has caused much concern and speculation surrounding the PERSONAL LIABILITY IMPLICATIONS THAT LIE AHEAD FOR DIRECTORS OF COMPANIES.

The Act has relaxed many of its regulations, such as the preparation of Annual Financial Statements, BUT this is certainly not the case for directors who do not adhere to a higher standard of conduct.

Directors are required to exercise care, skill and diligence within the powers entrusted to them by the shareholders, whilst at the same time being able to act independently and to guide the Company on the path to success.

Section 76 of the new Act seeks to codify the Common Law duties of directors and stipulates that the law be interpreted in accordance with our Common Law. These requirements place an onus on directors by compelling them to act honestly and in good faith.

Directors must act in a manner where they reasonably believe their decisions to be for the benefit of the Company and at the same time in the best interests of the Company. Therefore, it would be wise to ensure that as a director you familiarise yourself with your common law duties.

IN TERMS OF SECTION 77 OF THE NEW COMPANIES ACT, A DIRECTOR, PRESCRIBED OFFICER AND MEMBER OF A BOARD IS LIABLE IN THE FOLLOWING CIRCUMSTANCES:

  • A breach of fiduciary duty;
  • For losses, damages or costs resulting from:
    • Acting without the necessary authority;
    • Agreeing to the Company carrying on business from an insolvent position;
    • Carrying on business in a reckless manner, with gross negligence or with the intent to defraud any person or for a fraudulent purpose;
    • Acting or omitting to act with the knowledge that the effect is to defraud a creditor, employee or shareholder or for any other fraudulent purpose;
  • For signing or consenting to the publication of Annual Financial Statements or a prospectus which contains an untrue statement;
  • For knowingly consenting to the issue of shares, which had not been authorised;
  • For granting unauthorised options;
  • For agreeing to the granting of financial assistance to directors or other parties, when not in accordance with requirements;
  • For knowingly failing to vote against a share purchase which was not in accordance with legislative requirements;
  • A director will only be liable for failing to vote against a distribution if immediately after so voting the company failed to satisfy the solvency and liquidity test and that this was reasonably predictable;
  • Liability is joint and several with other parties found liable in the Act;

Action to recover any resultant loss, damages or costs may not commence more than 3 years after the act or omission by the director(s) in question.

In addition to Section 77’s stringent regulations, Section 214 of the Act makes false statements, reckless management and failure to comply criminal offences with the possibility of high fines and even imprisonment!!!

FORTUNATELY:

v The Act does protect the rights of directors to a certain extent by providing for the Company to advance expenses to a director to
defend litigation in any proceedings arising out of the director’s service to the Company.
v The Company may also indemnify a director for such expenses BUT only when such expenses are not a result of any action against
the director for liability for gross negligence, wilful misconduct or breach of trust.
v A company may also purchase insurance to protect itself or a director against liability and expenses as contemplated by Section 78.

Considering the above information one may wish to convert to a Close Corporation where the liability is more relaxed than that of other forms of business enterprises.

The general rule of thumb is that where a Close Corporation is unable to pay its debts, this does not result in the members being personally liable for its debts. However, this relaxation does not pave the road for members to trade recklessly. If a member is found to be trading recklessly, he or she will be held personally liable for the debts of the Close Corporation.

We urge you to consider the alternative of either converting to a Close Corporation or purchasing the necessary insurance to protect yourselves. Please CONTACT KAREN VENTER at our offices for further information.

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All material subject to our Legal Disclaimers.

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