In the evolving framework of corporate governance, directors play a crucial role in guiding companies towards sustainable success. However, with significant authority comes substantial responsibility, and in South Africa, directors must navigate a complex framework of legal obligations and potential liabilities. This article explores the liabilities that directors face under South African law and the protections available to them.
Understanding Directors’ Liability
Under the Companies Act 71 of 2008 (as amended) (“the Companies Act”), directors are responsible for managing the company’s affairs and making decisions that affect its future. However, this responsibility carries inherent risks, as directors can be held liable for various actions or omissions. Key areas of potential liability include:
1. Breach of Fiduciary Duty
According to Section 76 (3) of the Companies Act, directors owe a fiduciary duty to the company, which includes acting in good faith and the company’s best interests, exercising care and skill, and avoiding conflicts of interest. Section 76(3)(c) further stipulates that a director of a company, in performing their duties, must exercise their powers and fulfil their responsibilities with the degree of care, skill, and diligence that could be reasonably expected from an individual in a similar position. This expectation considers the general knowledge, skill, and experience of the director. Consequently, this provision expands the scope of their fiduciary obligations and may expose directors to potential personal liability.
Case Study: Breach of Fiduciary Duty
In the case of Khampepe v. Barloworld Limited [2020], directors were found liable for failing to disclose a conflict of interest that adversely affected the company’s interests. The court ruled that their actions constituted a breach of fiduciary duty, emphasising the importance of transparency and integrity.
2. Negligence and Recklessness
Under Section 77(2) of the Companies Act, a director of a company may be held liable for loss, damages, or costs incurred by the company in two main ways: first, for breaching fiduciary duties under sections 75, 76(2), or 76(3)(a) or (b) of corporate legislation, which includes obligations like acting in good faith and avoiding conflicts of interest; and second, for delictual conduct leading to negligence or misconduct that harms the company. This liability highlights the importance of adhering to legal and ethical standards in corporate governance.
3. Statutory Liabilities
Section 218(2) of the Companies Act establishes that an individual who contravenes the provisions of the Act may be held liable to any affected party for losses or damages incurred as a result of that contravention, potentially resulting in personal liability.
4. Insolvency and Reckless Trading
In cases of insolvency, directors must be particularly vigilant. Section 22(1) of the Companies Act prohibits trading while insolvent, and directors can be held personally liable for debts incurred if they continue to trade when they know, or ought to know, that the company is insolvent.
Case Study: Reckless Trading
In eThekwini Municipality v. Tetra Tech [2019], directors were held liable for reckless trading after continuing to incur debts despite clear signs of insolvency. The court ruled that their actions constituted gross negligence and a violation of Section 22(1).
5. Directors’ Protections
While directors face significant risks, South African law provides several protections to mitigate these liabilities:
- Business Judgment Rule
The “business judgment rule” as established in section 76(4) of the Companies Act, serves to protect directors from liability when making decisions in good faith and the best interests of the company. According to this rule, a director meets their obligations if they take reasonable steps to inform themselves about a matter, have no conflicting personal financial interests, and make decisions based on a rational belief that such decisions benefit the company. Furthermore, directors are permitted to rely on the contributions of other individuals or committees, as well as on the information provided to them, thereby reinforcing a framework of accountability and informed governance. This protection encourages directors to adopt a proactive approach to corporate management.
- Indemnity and Insurance
Section 78 (6) of the Companies Act allows companies to indemnify directors against certain liabilities incurred while acting in their capacity as directors, provided that the indemnity does not cover liabilities arising from wilful misconduct or breach of duty. Additionally, Section 78 (7) prescribes that a company may, subject to its Memorandum of Incorporation (“MOI”), obtain insurance to protect: (a) a director against liabilities or expenses for which indemnification is permitted; and (b) the company against any liabilities for which it is permitted to indemnify a director.
- No automatic liability under the role of director
Section 19 (2) of the Companies Act provides that a person shall not be held liable for any liabilities or obligations of a company solely by being an incorporator, shareholder, or director, except as otherwise stipulated in this Act or the company’s MOI.
- King IV Principles
The King IV Report on Corporate Governance, 2016 (“King IV”) emphasises ethical leadership and responsible governance. While it does not provide legal protections like a statutory document would, adherence to its principles can mitigate risks. For instance, Principle 1 of King IV emphasises the importance of ethical and effective leadership by the governing body. This necessitates that directors act in the best interests of the company and its stakeholders. By committing to this principle, directors promote a culture of transparency and accountability, which can serve as a protective measure against potential liability.
Conclusion
Directors in South Africa face a myriad of potential liabilities, from breaches of fiduciary duties to statutory compliance failures. However, understanding the legal landscape and implementing appropriate safeguards can significantly mitigate these risks. By embracing the principles of good governance as outlined in the Companies Act and King IV, directors can protect themselves and enhance their organisations’ overall stability and success.
For directors seeking to navigate these complexities, consulting with legal professionals specialising in corporate law is advisable. At Rasiluma TD Attorneys Inc., we are committed to providing our clients with the guidance and support necessary to thrive in today’s corporate environment while minimizing legal risks.
