Background:
Prior to the introduction of the Companies Act No 71 of 2008 (“Companies Act”), duties pertaining to the directors (“Fiduciary Duties”) were governed by South African common law (“Common Law”). The Common Law stipulates that the directors must always act in the utmost good faith and exercise their Fiduciary Duties with the necessary skill, care and diligence towards a company to subsequently promote a company’s success. If a director should fail regarding the exercise of these Fiduciary Duties, the possibility will arise for a director to be personally liable to the extent of the failure at hand.
Section 76 of the Companies Act codifies the abovementioned Common Law Fiduciary Duties and extends the Fiduciary Duties and responsibilities of directors together with a widening of their accountability. Section 76 of the Companies Act sets out what is expected from directors in conducting their Fiduciary Duties and compels all directors to act in good faith, honestly and in any manner they believe will be in the best interest/benefit of a company. The basic goal of directors is to ensure a company’s success and the collective best interest of all the shareholders without any other ulterior motives.
In accordance with the Companies Act, a director will also be held liable for any loss, damages or costs that may have been sustained by a company resulting from the breach of the director’s duties.
In light of this factual background, the question which then arises is whether the Companies Act goes on to extend the directors Fiduciary Duties to third parties. This article aims to unpack and answer this question.
Extent of Fiduciary Duties of directors:
It is widely held within South African law that the Fiduciary Duties imposed on directors in terms of the Companies Act only applies to their relationship with a company. Directors owe no fiduciary duties to any members/shareholders individually. A Director’s fundamental and principal duty is thus to, amongst other things, act in the best interest of a company and its shareholders.
This principle that a director only owes a Fiduciary Duty towards the company was questioned in the case of Lewis Group Ltd v Woollam and Others (2017) 1 All SA 192 (WCC) where it was held that ‘. . . it bears remembering that the duty of company directors to act honestly and in accordance with their fiduciary duties to the company is owed not only to the company, but also to the shareholders personally.’ Despite this remark, the principle that the Fiduciary Duties of directors is only owed to a company and not shareholders is still very much entrenched within South African law, contrasting the more lenient interpretation and characterisation lent in other jurisdictions to the ambit of the nature of directors’ Fiduciary Duties.
The board of directors and the shareholders of a company can both be seen as organs of a company, with each having its own powers. In Letsing Diamonds Ltd v JCI Ltd & Others (2009) JOL 23194 (SCA), where individual shareholders instituted action against the directors of the company for the breach of their fiduciary obligations, the court held that should the relevant directors contravene their fiduciary obligations, that only the company will be able to make claims towards such conduct. If this principle is not followed, it will result in endless actions being brought by shareholders against the directors of the company. It is therefore within a shareholder’s right to get a company to take the necessary steps towards any wrongful conduct attributed to the directors. It should be noted that when an individual right of a shareholder to a company is breached, such shareholder will have the right to sue in her/her/its own name to protect his/her/it’s right being violated.
Directors’ liability under the Companies Act:
Section 218 of the Companies Act states that “Any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.”
It should be noted that the said section does not specifically state what contravention can be sued for. If any party is to institute action in accordance with this section against the directors of a company, it must be stated with sufficient particularity what specific contravention, which is attributed to the directors, is relied upon and details of the exact loss or damages suffered. Furthermore, third parties can institute proceedings against directors for a breach of their Fiduciary Duties or other duties in terms of section 218 of the Companies Act, however, these Fiduciary Duties are only owed towards a company and not to third parties.
Concluding remarks:
In conclusion, it is widely regarded in South African law that the Fiduciary Duties imposed on directors in the exercise of their powers and functions is solely owed to a company and not towards any third party. A third party will however be able to institute the necessary action against a director for the breach of any of his/her duties, if such breach caused any damages or losses towards such third party.
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Published 24 July 2023