Directors Part 1 – your duties, and your risk

This article first appeared in CA(SA)DotNews 

Your risk of personal liability for any “loss, damages or costs”, sustained through your actions (or omissions) by any company of which you are a director, has risen sharply since the new Companies Act came into force in 2011.

Your potential liability is in effect enforceable not only by your fellow directors but also by shareholders, employees and trade unions.  All of them can, if need be, force the company to take action against you.

All in all, your risk is high, and you need to understand, manage and restrict your exposure.

Firstly, are you a “director”?   

This is critical.  Even if you aren’t on the letterhead as a formally-appointed director, you could well be at risk, because “director” here includes anyone occupying the position of director regardless of title, it includes alternate directors, members of board and audit committees, even “prescribed officers” (broadly, senior managers and officials with defined levels of power or function).  Note also that that the Act makes no distinction between executive and non-executive directors – so non-executives must inform themselves fully as to the company’s affairs, and be able to prove accordingly in need.

Your duties 

Your duties as a director are wide-ranging and onerous.  In broad summary (take advice for specifics), the Act requires that –

• You act strictly within the limits of your authority, in accordance with the Act, and in accordance with the company’s MOI (Memorandum of Incorporation)

• You don’t acquiesce in the carrying on of the company’s business recklessly, with gross negligence, or fraudulently

• You aren’t party to any act or omission with a fraudulent purpose or “calculated to defraud a creditor, employee or shareholder of the company”

• You do not sign, consent to or authorise any misleading financial statements or information

• You vote against any proposed prohibited activity such as payment of a dividend to the company’s prejudice, unauthorised issuing of shares, etc

• You use your position as director (and knowledge you obtain while acting as such) only to the advantage of the company – never for your own or another person’s advantage

• You never “knowingly” cause harm to the company

• You keep the company informed of any relevant information you become aware of

• You always act –
  • In good faith and “for a proper purpose”
  • In the company’s best interests
  • With the “degree of care, skill and diligence” required of a director in your position.