A registered company is a separate legal entity, distinct from its shareholders. As a general rule, shareholders are not personally responsible for liabilities of the company and are unable to obtain ownership in any of its assets.
The Companies Act, No. 71 of 2008 (“the Act”) came into effect on 1 May 2011 and introduced a number of strenuous provisions. One such provision has the effect of broadening directors’ liability. Directors may be unaware that the separate legal identity of the company may no longer offer them the protection against personal liability as originally intended at the time of incorporation.
The definition of a director has been broadened by the Act and now also includes the following persons: alternative director; prescribed officer (person who regularly has material participation in exercising general executive control over and management of the whole, or a significant portion, of the business and activities of the company); a person who is a member of a committee of a board of a company or of the audit committee of a company. A person who accepts an appointment as a director will be measured against a higher standard of skill and care in the exercising of his or her administrative duties and becomes liable to the shareholders to perform such duties for the benefit of the company. This elevated duty of care applies equally to prescribed officers and committees of the board of the company.
Directors remain liable for breach of the fiduciary duty conferred upon them by virtue of common law principles. A company may furthermore specify additional operational specific requirements for directors in the company’s Memorandum of Incorporation (“MOI”). A director in breach of such duties may be held liable by the company for loss, damage and costs sustained by the company jointly and severally with other liable directors. An executive director may thus be personally liable for the actions of his or her co-directors or actions of their appointed board committee. This has the effect that a director may literally end up paying for someone else’s negligence. To mitigate these risks, it may be advisable to acquire liability insurance as permitted by the Act and if requisitioned thereto by a company’s MOI. It should be pointed out that insurance may not provide protection in instances where: willful misconduct occurs; a director acts on behalf of the company knowing that the he or she lacks the authority to do so; and a director acted (or failed to act) where such act or omission was calculated to defraud the company.
Directors may also attract liability if they fail to vote against the distribution of a benefit to a co-director, if the company will be unable to satisfy the solvency and liquidity tests immediately after the distribution has been made. Even passive directors will attract liability if they fail to vote against the distribution in such circumstances. In this regard it would be in the best interests of both the company and directors to keep, for evidentiary purposes, minutes and a record of resolutions passed at directors’ meetings, which is also a requirement in terms of the Act.
It is clear that the legislature has set its sights on poorly run companies and should such entities go belly up, directors may find themselves unable to hide behind an empty shell.
Gerhard Truter is a director of Barnard Incorporated, Centurion. This article published with the kind assistance of Legalex (Pty) Ltd, a proud Risk Manager to Camargue.