Directors Responsibilities and Liability in terms of the Companies Act No. 71 of 2008

General responsibilities of the board of directors include:

  • oversight of control and accountability;
  • development of strategy and performance objectives;
  • systems of risk management and internal compliance and control, codes of conduct and legal compliance;
  • monitoring management’s performance and implementation of strategies and ensuring appropriate resources are available;
  • approving and monitoring the progress of major capital expenditure, capital management and acquisitions and divestments;
  • approving and monitoring financial and other reporting; and
  • board appointments, removals and succession planning.

Directors responsibilities under the Companies Act No. 71 of 2008 (“New Act“):

In addition to encourage entrepreneurship and high standards of corporate governance, among others, it is a purpose of the New Act to balance the rights and obligations of shareholders (members) and directors, and to also encourage the efficient and responsible management of a company. In terms of the New Act a company’s governing document is the Memorandum of Incorporation (no longer referred to as the memorandum and articles of association).

The Memorandum of Incorporation should serve as a higher standard than legislation and should allow for smoother governance processes. It is intended that the Memorandum of Incorporation be binding between the company and each director or member of the company. This document may only be amended  in terms of a court order or by virtue of a special resolution.

The New Act provides for the business and affairs of a company to be managed by,  or under, the direction of its board. The board has the authority to perform any of the functions of the company except to the extent that the New Act or Memorandum of Incorporation provides otherwise.

Liability of directors in terms of the New Act is as follows:

A company may recover losses, damages or costs sustained by the company from the directors in, inter alia,  the following circumstances:

  • in terms of the principles of common law or the provisions of the law of delict relating to the breach of fiduciary duties;
  • where a director acted in the name of the company or signed anything on behalf of the company whilst the director knew he or she lacked the necessary authority;
  • the director conducted the company’s business in contravention of the provisions in the New Act relating to pre-incorporation contracts;
  • the director is a party to an act or omission by the company despite knowing that the act or omission was calculated to defraud a creditor, employee or shareholder of the company or had another fraudulent purpose;
  • the director signed, consented to, or authorized the publication of any financial statements that were false or misleading in any material respect;
  • the director signed, consented to or authorized, the publication of a written statement that contained “untrue statements” or a statement to the effect that a person had consented to be a director of the company, when no such consent had been given, despite knowing that the statement was false, misleading or untrue; and
  • where the director was present at a meeting or participated in making a decision at a meeting where there was non-compliance with the formalities prescribed in the New Act.

Indemnification of directors in terms of the New Act:

A company is entitled to take out indemnity insurance to protect a director (barring the situation where the director is convicted of an offence) so far as they are allowed to indemnify the director, the company may also indemnify itself against expenses advanced to a director in terms of such indemnity and accordingly in terms of Section 78 of the New Act, indemnity also applies to former directors of the company and allows for restitution claims form directors.

Indemnification is not allowed in the following situations:

  • the director acted in the name of the company and signed on behalf of the company and purported to bind the company without the necessary authority;
  • where the director consented to carry on the business of the company despite the business being insolvent;
  • where an intent to defraud an employee or creditor and relied on any act or omission connected thereto;
  • willful misconduct or willful breach of trust; or
  • the director is liable for an offence or fine in terms of national legislation.

Take note of this interesting article “Top executives will become more demanding thanks to new Company Act“

09 March 2011