Understanding Director Duties and Liabilities in South Africa

Directors in South Africa have important legal duties and responsibilities, aimed at promoting good governance, protecting the interests of shareholders and ensuring compliance with legal and regulatory requirements. In this article, we'll explore the legal duties and liabilities of directors in South Africa, including the fiduciary duty of care, the duty to act in good faith, and the potential legal and financial consequences of breaching these duties.

Who is a Director?

A person becomes entitled to serve as a director if he/she is appointed or elected and has delivered a written consent to the company. However, the appointment as director does not translate to the appointment of a person as an employee of the company.

How do you appoint a Director?

In South Africa a director of a company needs to be appointed in terms of the Companies Act 71 of 2008, as read with the company’s memorandum of incorporation and if applicable, shareholders agreement. Once duly appointed, such appointment needs to be registered with the Companies and Intellectual Property Commission (“CIPC”).

Fiduciary Duty of Care

Directors in South Africa have a fiduciary duty of care, which requires them to act in the best interests of the company and its shareholders. This duty includes:

• The duty to act with care and diligence: Directors must exercise reasonable care and skill when making decisions and managing the affairs of the company.

• The duty to act honestly and in good faith: Directors must act honestly and in good faith, without conflicts of interest or personal gain.

• The duty to avoid reckless trading: Directors must avoid reckless trading that could harm the financial stability of the company.

In South Africa, directors of companies have to comply with the duties imposed upon them in terms of, inter alia, the Companies Act and the common law.

What does “Fiduciary Duty” mean?

A fiduciary duty exists in law when a person or entity places trust, confidence and reliance on another to exercise discretion or expertise in acting on behalf of the client. The fiduciary must knowingly accept that trust and confidence.

Liabilities for Breaching Director Duties

Directors in South Africa can face legal and financial consequences for breaching their duties, including:

• Civil liability: Directors can be held personally liable for damages suffered by the company or its shareholders as a result of their breach of duty.

• Criminal liability: Directors can face criminal charges for serious breaches of duty, such as fraud or corruption.

• Disqualification: Directors can be disqualified from serving as a director of a company for a period of time if they are found to have breached their duties.

• Financial penalties: Directors can face financial penalties, including fines and orders to repay losses, as a result of breaching their duties.

When can a Director be held Personally Liable?

In terms of the Companies Act, there are several provisions in terms of which a director may be held personally liable for a breach of their duties in terms of the Companies Act.

A director may be held personally liable where a director has:

• permitted the company is trade recklessly or under insolvent circumstances;

• breached his/her fiduciary duties and caused any loss or damage to the company as a result;

• acts in the name of the company without having the required authority and causes the company to suffer losses or costs as a direct or indirect consequence of such conduct;

• been a party to conduct by the company which was with the intention to defraud a creditor, employee, or shareholder of the company;

• bound himself/herself in his/her personal capacity as surety for a debt of the company.

Reckless Trading Explained.

Section 22(1) of the Companies Act provides that if a company carries on its business recklessly or with gross negligence, with the intent to defraud any person or for any fraudulent purpose, the directors and prescribed officers can be held personally liable.

Protecting Against Director Liabilities

Directors can take several steps to protect themselves against liabilities, including:

• Seeking legal advice: Directors should seek legal advice to ensure that they understand their duties and obligations, and how to comply with legal and regulatory requirements.

• Conducting due diligence: Directors should conduct due diligence when making decisions, including researching the market, the company's financial position, and legal and regulatory requirements.

• Maintaining proper records: Directors should maintain proper records of their decision-making processes, to demonstrate that they have fulfilled their duties and complied with legal and regulatory requirements.

Conclusion

Directors in South Africa have important legal duties and responsibilities, aimed at promoting good governance, protecting the interests of shareholders, and ensuring compliance with legal and regulatory requirements. By understanding their duties and liabilities, directors can make informed decisions and take proactive steps to protect themselves and their companies from legal and financial consequences.

Should you require legal advice on avoiding personal liability or bringing or defending a claim for personal liability against a director, contact us for further information.