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June 2011
COMPANIES ACT
2008 – DIRECTORS’ RESPONSIBILITIES
AND LIABILITY
By Willie Smith,
Exceed, in association with Tenk Loubser
& Associates |
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Willie
Smith
Exceed, in association with
Tenk Loubser & Associates |
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Do
you still want to be a director under
the new Companies Act? Directors’
need to know their rights and must
be aware of what is expected of them.
They are subjected to the common law,
as found in court rulings and judgments.
New Companies Act
The new Companies Act 2008 became
effective on the 1st of May, after
numerous changes and delays, 4 days
after the act was published in the
Government Gazette and, will no doubt,
have significant consequences for
all stakeholders and directors of
companies.
Who is
a Director?
A director means a member of a board
of a company, as contemplated in section
66, or an alternate director of a
company and includes any person occupying
the position of a director or alternate
director, by whatever name designated.
Accountability and Transparency
While the new Companies Act 2008 aims
to provide a flexible regime that
balances accountability and transparency
with less of a regulatory burden,
one aspect of the new Companies Act
(No 71 of 2008) is that it records
the common law duties and responsibilities
of directors, which provides clarity
in the performance of the obligations. |
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Encouraging Entrepreneurship
In addition to encouraging entrepreneurship and
high standards of corporate governance, amongst
others, a purpose of the new Act is 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).
Memorandum of Incorporation
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 or in accordance with
section 36(3 & 4) of the Companies Act, 2008.
The new Companies 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 Companies Act or Memorandum of Incorporation
provides otherwise.
Directors’
Responsibilities and Liability Consequences
Some of the directors’ responsibilities
and liability consequences we need to be aware
of, but is not limited to, are:
| 1. |
General responsibilities
of the board of directors’ include: |
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1.1. Oversight of control and accountability;
1.2. Development of strategy and performance
objectives;
1.3. Systems of risk management and internal
compliance and control, codes of conduct
and legal compliance;
1.4. Monitoring management’s performance
and implementation of strategies and ensuring
appropriate resources are available;
1.5. Approving and monitoring the progress
of major capital expenditure, capital management
and acquisitions and divestments;
1.6. Approving and monitoring financial
and other reporting; and
1.7. Board appointments, removals and succession
planning. |
| 2. |
Directors’ responsibilities
under the current Companies Act 1973 (“the
Current Act") |
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2.1. Presently the rights and obligations
of a director are imposed by the Current
Act, the Articles of Association of a company
2.1. and common
law; and
2.2. A director is required to act in good
faith, act independently with the degree
of care, diligence and skill, that may reasonably
2.1. be expected
from a person of his/her knowledge and experience,
within the scope of authority as prescribed
by the
2.1.
Memorandum and Articles of Association of
the company and as a member of the board. |
| 3. |
Directors’ responsibilities
under the current Companies Act 1973 (“the
Current Act") |
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3.1 The core duties – Section 76
of the Act:
3.1
• Disclose any conflict of
interest (Section 75)
3.1
• Use position and information
for company’s benefit
3.1
• Disclosure of material information
3.1 •
Perform Duties:
3.1
3.1- In good
faith
3.1
3.1- In best
interest of the company
3.1
3.1- With care,
skill and diligence
3.1
• With care, skill and diligence
that may be reasonable be expected of a
person carrying out such functions and having
the
3.1•
same skill and experience of that director
– the reasonable man/woman test
3.2 Strategy and corporate structure:
3.1 •
Duty to comply with the Act in relation
to different types of companies (Section
8)
3.1 •
Duty to comply with the company’s
Memorandum of Incorporation (Section 13)
3.1 •
Duty to manage the business affairs at the
company (Section 66(1))
3.1
• Duty to carry on the business
without trading recklessly or under insolvent
conditions (Section 22)
3.3 Board Structure and corporate administration:
3.1 •
Duty to appoint board committees (Section
72)
3.1 •
Duty to appoint an audit committee (Section
94) – Only applicable in certain instances.
3.1 •
Duty to appoint a company secretary (Section
84 & 86) - Only applicable in certain
instances.
3.1
• Duty to call and convene
shareholder’s meeting (Section 61)
3.1 •
Duty to call and convene directors’
meetings (Section 73)
3.4 Accountability and Assurance:
3.1
• Duty to keep company records
(Section 24)
3.1
• Duty to keep accounting records
(Section 28)
3.1
• Duty to comply with Chapter
3 of the Act (Section 34(1) & 94)
3.1 •
Duty to pay director’s remuneration
in terms of memorandum of incorporation
and get it approved by shareholders by
3.1 •
special resolution (Section 66 (8) &
66(9))
3.1 •
Duty to appoint auditors (Section 90 &
92) – Only applicable in certain instances.
3.1 •
Duty to obtain an independent review of
the financial statements
3.5 Disclosure and Transparency:
3.1
• Duty to prepare annual financial
statements (Section 29 & 30)
3.1
• Duty to prepare a directors’
report (Section 30(3))
3.1
• Duty to issue a prospectus
(Section 100)
3.1
• Duty to disclose director’s
remuneration information (Section 30)
3.1 •
Duty to file an annual return (Section 33)
3.6 Shareholder Treatment:
3.1
• Duty to insure that shareholders
can exercise their voting power and rights
(Section 2(2) & 58)
3.1
• Duty to facilitate a shareholders
meeting (Section 61)
3.1
• Duty to operate within the
framework of the company’s memorandum
of incorporation (Section 15(3) & (4)
& 36)
3.1
• Duty to operate in the best
interest of the shareholders (Section 20(6)
& (7) & 76(3)) |
| 4. |
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 (limited to 3 years after
the deed has taken place): |
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• 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 authorised,
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. |
| 5. |
Indemnification of
directors in terms of the New Act: |
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1. A company is entitled to take out indemnity
insurance to protect a director (barring
the situation where the director is
1. convicted
of an offence) so far as they are allowed
to indemnify the director, the company may
also indemnify itself against
1.
expenses advanced to a director
in terms of such indemnity and accordingly
in terms of Section 78 of the New Act,
1. indemnity
also applies to former directors of the
company and allows for restitution claims
from directors.
2. 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;
....•
Wilful misconduct or wilful breach of trust;
or
....•
The director is liable for an offence or
fine in terms of national legislation.
....•
In light of the above the people responsible
with governance in companies need to ask
the following key questions: |
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i. Am I complying with my
common law and statutory duties as set out
above?
ii. Are there any provisions in the memorandum
or articles of association, which impose
additional duties on me?
iii. Is there a conflict of any nature between
my interests and those of the company?
iv. Am I sure that contracts I enter into
on behalf of the company are within the
scope of the memorandum
iv.
and articlesof association?
v. Has the company taken out directors and
officers liability insurance and am I sure
I understand the
v.
conditions under which I am indemnified?
vi. Do I need to seek independent professional
advice to enable me to better understand
my role and duties as a
vi.
director? |
Sourced From: Exceed |
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