What are your duties as a Director?

The new Companies Act: A one hour training intervention summarising the responsibilities and rights of Directors and Office Bearers

In CIR v Richmond Estates (Pty) Ltd[1] Centlivres cj stated the following:

‘A company is an artificial person “with no body to kick and no soul to damn” and the only way of ascertaining its intention is to find out what its directors acting as such intended. Their formal acts in the form of resolutions constitute evidence as to the intentions of the company of which they are directors but where a company has only one director, who is also the managing director and the sole beneficial owner of all its shares, I can see no reason in principle why it should be incompetent for him to give evidence as to what was the intention of the company at any given time. In such a case it is, perhaps, not going too far to say that his mind is also the mind of the company.’

And Wessels JA stated in Elandsheuwel Farming (Edms) Bpk v SBI that:

‘it must be remembered that the dealings of a juristic person are controlled by human beings, and that they are the brain and ten fingers thereof'[2].

Appointment of directors

When a company is incorporated it must appoint one or more directors. The Companies Act specifies that a private company must have at least one director and a public company at least three directors. The Memorandum of Association (MoI) may specify a higher number.[3]

The appointment and removal of directors is determined by the MoI, subject to the requirements of the Act. At least 50% of the directors and 50% of the alternate directors of a company must be appointed by the shareholders.[4] A director must consent in writing to his appointment.

Election of directors

Directors must be elected by a majority of shareholders who have the voting rights to do so. The term of office may be indefinite or may be prescribed by the MoI.[5]

Ineligibility and disqualification of directors[6]

The Act sets out the circumstances under which a person maynot be appointed as a director or a prescribed officer. The MoI may impose additional grounds of ineligibility or minimum qualifications for directors.

The Commission is required to establish and maintain a public register of persons who are disqualified from serving as a director. [7]

Removal of directors[8]

A director may be removed from office by an ordinary shareholders resolution. The director must be given notice of the meeting and the resolution and must be afforded a reasonable opportunity to make a presentation to the meeting before the matter is put to the vote.

Remuneration[9]

Unless the MoI provides otherwise, a company may remunerate its directors for their services as directors. The reference to remuneration ‘for service as directors’ appears to exclude salaries to executive directors in their capacity as employees of a company. The remuneration must be in terms of a special resolution approved by the shareholders within the previous two years[10].

 

Nevertheless to comply with the spirit of the legislation and with the requirements of King III, shareholders should approve the remuneration policy of the company. It would be impractical to approve specific remuneration packages for executive directors every second year in advance.

The Act does, however, require directors’ remuneration to be disclosed individually in the annual financial statements of companies that require an audit.[11]
Section 30(6) defines remuneration for this purpose and includes salaries in the definition. Full disclosure of directors and prescribed officers’ remuneration must therefore be made in the annual financial statements of audited companies.

Loans or other financial assistance to directors[12]

Unless the MoI prohibits it from doing so, the board of a company may authorise the company to provide direct or indirect financial assistance to a director (and certain other related parties). Such financial assistance may include lending money, guaranteeing a loan or other obligation or securing any debt of a director.[13]

 

However, the provision of financial assistance may only be granted if it is:

  • In respect of an employee share scheme; or
  • Approved by a special resolution of the shareholders which has been adopted within the previous two years. [14]

and complies with any conditions or restrictions in the MoI. [15]

In addition the board must be satisfied that the terms under which the financial assistance is proposed are fair and reasonable to the company and that, immediately after providing such assistance the company still satisfies the solvency and liquidity test.[16]

If the board adopts a resolution to extend financial assistance to a director, the shareholders must be informed in writing (unless every shareholder is also a director) and any trade union representing the employees of the company must also be informed. [17]

Where a loan or financial assistance has been granted to a director by the company or by a third party to which the company is a guarantor, details of the loan must also be disclosed in audited financial statements.[18]

This section is clearly intended to protect a company from abuse by directors using it to finance their personal affairs. A director is liable if he was present at or participated in a decision to extend financial assistance or if he failed to vote against the resolution or agreement, knowing that it was inconsistent with the Act or the provisions of the MoI. [19]

Board meetings[20]

Board meetings may be conducted by electronic communication. . The board determines how and when meetings will take place in accordance with the requirements of the MoI or the Rules of the company. All the directors must receive notice of the meeting. A majority of the directors must be present at a meeting before a vote may be called and a majority of the votes cast is sufficient to approve a resolution.

 

Minutes must be maintained of all directors meetings and must include any declarations of directors’ personal financial interests as well as every resolution adopted by the board. Resolutions must be dated and sequentially numbered. The minutes and any resolutions must be signed by the chair of the meeting or the chair of the next meeting.

As directors may find themselves liable for actions or decisions taken in board meetings, it is important that minutes are detailed and accurate, reflecting all relevant information, such as who provided information; the reasons for a particular decision; who attended the meeting and how each director voted.

Register of directors[21]

A company must maintain a register of its directors, both past and present. The information pertaining to past directors must be retained for seven years after the director has retired from the company. The record must include the following information about each director: [22]

  • Full name and any former name
  • Identity number or date of birth if the person does not have an identity number
  • Nationality and passport number if the person is not a South African
  • Occupation
  • Date of most recent election or appointment as a director of the company
  • Name and registration number of every other company or foreign company of which the person is a director. In the case of a foreign company, the nationality of that company
  • Any other prescribed information

Board committees

A board may, subject to its MoI, appoint any number of committees consisting of directors and delegate authority to them. Committees may include non-directors but such persons must conform to the same eligibility requirements as directors. Non-directors who serve on a board committee are not entitled to vote on matters to be decided by the committee [23]but are nevertheless subject to the same duties and liabilities as directors

The Minister may prescribe categories of companies that are required to have a social and ethics committee. [24] All public companies are required to appoint and audit committee consisting of non-executive directors of the company. Note however the audit committee is not a board committee but an independent statutory committee. [25]

Directors conduct and liability

The Companies Act aspires to be self-regulating, thereby placing responsibility for compliance with the law in the hands of those responsible for the management, control and supervision of the company. Consequently an entire section of the Act, Chapter 2, Part F, has been devoted to issues of governance. Director’s duties and standards of conduct are dealt with in sections 75 – 78. Directors and other persons affected by these provisions need to understand exactly what is required of them and what the consequences of non-compliance will be.

All three sections apply to directors, alternate directors, prescribed officers and persons who are members of a committee of a board of the company and to the audit committee, regardless of whether the person is also a member of the board.

A ‘prescribed officer’ is any person with general executive authority, responsibility for management of financial, and legal affairs, general managerial authority or who has or exercises influence over management and administration. This can include anyone from the CEO, the CFO, the accountant, the company secretary to the COO – anyone who directly or indirectly exercises or significantly influences control over the general management and administration of the business, regardless of the title or position the person holds.[26]

Members of board committees and of the audit committee may be non-executive directors or other persons co-opted to serve on committees. All these persons are subject to the provisions of the Act and may incur liability in terms of the Act.

Disclosure of personal financial interests[27]

Section 75 is one of the most important sections of the Act pertaining to directors and is aimed at transparency and to protect the company against directors taking unfair advantage of the company and the shareholders.

Directors have a responsibility to disclose any personal financial interest they may have in the affairs of the company. A director may not benefit or enrich himself or any related person at the expense of the company without first having disclosed that there is a personal financial interest in the company.

The interpretation in the Act of a ‘related person’ is extensive and includes married relationships, persons within two degrees of consanguinity and juristic persons where control exists over or between juristic persons.[28]

A director must disclose in advance, any personal financial interest (including any interest of a related person) in a matter to be considered by the board, together with material information and other pertinent observations and may not participate any further in the deliberations of the board concerning the matter.[29] Furthermore if a director (or a related person) acquires a personal financial interest in a matter that has previously been approved by the company, this must be disclosed promptly.[30]

The failure to make disclosure is a breach of fiduciary duty and exposes the director to liability in terms of common law for any loss, damages or costs sustained by the company as a result.

Standards of conduct

The Act sets out the standards of conduct for a director, including an alternate director, a prescribed officer and any person who is a member of a committee of the board or of the audit committee of the company.

A director is in a position of trust in relation to a company, the shareholders and to third parties dealing with the company. This fiduciary relationship imposes onerous responsibilities on a director and a breach of these responsibilities carries serious consequences. Many of these duties and responsibilities formed part of
the common law in the past. In the new Companies Act they have been made statutory responsibilities. A breach of these duties is now a statutory office.

Section 76 codifies the standard of conduct of directors but does not exclude any further common law duties that are not expressly spelled out in the Act. A director’s primary responsibilities are:

  • Not to use his position, or information obtained in that position for personal advantage or to knowingly cause harm to the company;
  • To communicate to the board at the earliest possible opportunity any relevant and material information that comes to his attention[31]
  • To perform his duties[32]
  • In good faith and for a proper purpose
  • In the interests of the company
  • With the degree of care, skill and diligence that may reasonably be expected of a person in a similar position and with similar knowledge, skill and experience

A director is required to take steps to be reasonably informed about matters concerning the company and to have a rational basis for believing that he has acted in the best interests of the company. In discharging his duties a director is entitled to rely on the performance of other persons to whom the board in entitled to, and has delegated authority. A director may also rely on information, opinions, recommendations, reports and statements prepared by reliable and competent employees, legal counsel, accountants and other professional persons retained by the company for their skills and expertise as well as on a committee of the board. [33]

Except in a case of wilful misconduct or breach of trust, a director may seek relief in court from any liability if the court believes that he has acted honestly and reasonably in the circumstances.

Liability of directors

Directors may incur liability for a variety of reasons. The liability goes beyond any statutory fine or prison term. Liability in common law generally means that the director will be personally liable for loss, damages or costs sustained by the company as a direct or indirect consequence of his failure to observe the requirements of the Act. The quantum is not
determined by contract, but is based on either the benefit gained by the director or the loss suffered by the company, or both.

Liability that does not fall under the common law is usually prescribed by the Act and in certain cases the penalties are particularly severe. In addition, for certain offences a director may be declared delinquent or placed on probation.

Directors may be held liable under common law for breach of fiduciary duty or else in delict. Breaches of fiduciary duty include: [34]

  • Failure to disclose a personal financial interest
  • Using information obtain in the capacity of a director for personal advantage
  • Failure to act in good faith
  • Failure to act in the best interests of the company

Delictual liability includes: [35]

  • Failure to act with the due care, skill and diligence that might reasonably be expected of a person in a similar position and with the same knowledge, experience and skill of the director
  • Failure to comply with any other provision of the Act
  • Failure to comply with any provision of the company’s Memorandum of Incorporation

A director may also incur liability for loss, damages or costs sustained by the company if he, directly or indirectly:[36]

  • Acted in the name of the company, signed on behalf of the company or attempted to bind the company or authorise it to act, knowing that he lacked the authority to do so
  • Acquiesced in the company trading recklessly or in insolvent circumstances
  • Was party to an act or omission by the company, knowing it was calculated to defraud a creditor, employee or shareholder, or was otherwise fraudulent
  • Signed, consented to or authorised the publication of financial statements, a prospectus or written statement, knowing it to be false,misleading or untrue
  • Was present at a meeting or participated in a decision and failed to vote against certain actions that are specifically circumscribed by the Act

Indemnification and directors’ insurance[37]

A person who accepts appointment as a director is expected to be responsible for his actions and to comply with the requirements of the Act. Consequently, if a director incurs liability as a result of non-compliance, he is expected to face the consequences. The company is not allowed to relieve him of his responsibilities or of the consequences of breaching them. [38]

 

In particular, the Act specifies that: [39]

  • A company may not exempt a director from the responsibility of disclosing his personal financial interests.
  • A director may not be relieved of his fiduciary responsibilities, nor he be indemnified from any liability incurred as a result of any breach of duties or non-adherence to the prescribed standards of conduct.
  • If a director is guilty of wilful misconduct or wilful breach of trust, the company may do nothing to negate or ameliorate the consequences arising from such an act.
  • A company may not, directly or indirectly, pay any fine incurred by a director who has been convicted of an offence in terms of any national legislation.

A director may not be indemnified against any liability arising as a result of:

  • Acting on behalf of the company without authorisation.
  • Being party to the company trading under reckless circumstances.
  • Being party to an act by the company intended to defraud or that has a fraudulent purpose.
  • Being convicted of an offence in terms of any national legislation.

A company may, unless its Memorandum of Incorporation provides otherwise, purchase insurance to protect a director against any liability or expenses for which it is permitted to provide indemnity or to protect itself against expenses it has advanced to a director who faces litigation arising out of his services to the company. [40]

Offences and penalties

Section 214 of the Act makes it an offence if a person

  • is a party to the falsification of any accounting records of a company
  • with fraudulent purpose, knowingly provided false or misleading information in any circumstances in which the Act requires information to be provided
  • was knowingly a party to reckless trading
  • was knowingly a party to an act or omission by a business that was calculated to defraud a creditor, employee or security holder of the company, or with another fraudulent purpose
  • is party to the preparation, approval, dissemination or publication of financial statements or other financial information

The penalty for a contravention of Section 214 is a fine or imprisonment for a period not exceeding 10 years or to both a fine and imprisonment. Such a penalty, if awarded against a director, would be in addition to any liability incurred as a result of a breach of the director’s other duties.

Declaring a director delinquent or under probation

In addition to the liabilities and penalties a director may incur as a result of a breach of his duties, the Act makes provision for a court to declare a director delinquent or to be placed on probation under various circumstances.

Delinquency

A court must declare a director delinquent if the person consented to serve as a director or acted in that capacity while he was ineligible or disqualified from doing so in terms of the Act, or if the person was under an order of probation. Such a declaration of delinquency is unconditional and subsists for the lifetime of a person.

In addition, a court must declare a director delinquent if the director:

  • Grossly abused the position of director
  • Took personal advantage of information or an opportunity obtained in his capacity as director
  • Intentionally or by gross negligence inflicted harm on the company or a subsidiary of a company
  • Acted in a manner that amounted to gross negligence, wilful misconduct or breach of trust
  • Has repeatedly been subject to a compliance order or similar enforcement mechanism for similar conduct
  • Has at least twice been personally convicted of an offence or fined in terms of any legislation
  • Has been, within a period of five years, a director or managing member of any juristic person that was convicted of an offence or subjected to an administrative fine during his term of office

A declaration of delinquency in the above circumstances subsists for seven years

Probation

A court may place a director on probation if, during his term of office, the person

  • Was present at a meeting and failed to vote against a resolution despite the inability of the company to satisfy the solvency and liquidity test
  • Acted in a manner materially inconsistent with the duties of a director
  • Acted in or supported a decision of the company to act in a manner that is oppressive or prejudicial or that is an abuse of the separate juristic personality of the company
  • Has, within a period of ten years, been a director or managing member of more than one juristic entity, two or more of which each failed to pay all of its creditors or meet all of its obligations

A probation order subsists for a period not exceeding five years.

Consequences of an order of delinquency or probation

In addition to issuing the order, a court may direct that the director

  • Undertake a designated programme of remedial education relevant to the nature of the person’s conduct as a director
  • Carry out a designated programme of community service
  • Pay compensation to any person adversely affected by the director’s conduct

In the case of probation:

  • Be supervised by a mentor in any future participation as a director while the order remains in force
  • Be limited to serving as a director of a private company o a company of which the director is a sole shareholder


[1] 1956 (1) SA 602 (A), 20 SATC 355 at 361.

[2] 1978 (1) SA 101 (A), 39 SATC 163 at 175.

[3] Section66(2)

[4] Section66(4)(b)

[5] Section 88

[6] Section 69

[7] Section69(13)

[8] Section71

[9] Section30(6)

[10] Section66(8),(9)

[11] Section30(4)(5)

[12] Section 45

[13] Section45(1)

[14] Section45(3)(a)

[15] Section 45(4)

[16] Section45(3)(b)

[17] Section45(5)(a)

[18] Section30(6)(g)

[19] Section45(7)

[20] Section73

[21] Section24(3)

[22] Section24(5)

[23] Section72(1)(2)

[24] Section72(4)

[25] Section94(2)

[26] Regulation 38

[27] Section 75

[28] Section 2

[29] Section 74(4)

[30] Section 74(5)

[31] Section 76(2)

[32] Section 76(3)

[33] Section 76(4)(5)

[34] Section 2(a)

[35] Section 2(b)

[36] Section 3

[37] Section 78

[38] Section 78 (2)

[39] Section 78(6)

[40] Section 78(7)


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