What does it mean to be a director, what are the responsibilities and is there any liability?
You may have always dreamed about owning your own company.
You have your concept, you have drafted your business plan, run all your forecasts, and you have chosen the perfect name. You may have approached an Attorney or other company to assist you with having your company registered at the Company and Intellectual Property Commission (CIPC).
You’ve followed all the steps, and now, you’re a director. But what does that mean, exactly?
- Do I know which duties and responsibilities are required by law?
- Do I think that my company is a separate legal entity and that my company’s liabilities won’t affect my estate and me?
If you answered no to any of these questions, you need to read on.
Firstly, what are the director’s roles and responsibilities?
The Companies Act, No 71 of 2008 (“the Act”), defines a director as:
“A member of the board of a company …., or an alternate director of a company and includes any person occupying the position of director or alternate director, by whatever name designated”.
As a director of a company, you are responsible for the daily, weekly and monthly financial management of the company. In doing so, you are required to act in good faith and the best interests of the company, exercising care, skill, diligence and independent judgment to promote company sustainability and success.
You also have a fiduciary duty to act in the best interests of your company, in good faith and with a proper purpose without any direct or personal advantage for the director or “related party” to the director and to avoid conflicts of interests.
Section 66 of the Act states: all the business and affairs of a company must be managed by, or under the direction of its board of directors. The directors have the authority to exercise power and perform functions within the company, except where the Act or the company’s Memorandum of Incorporation (MOI) states otherwise.
Do you pass the business judgement test?
Section 76(4) of the Act introduces the so-called business judgement test and states that a director will have satisfied their obligations if they:
- Have taken reasonably diligent steps to become informed about the matter;
- Had no personal financial interest and had no reasonable basis to know that a related person has a personal financial interest, or had the financial interest and disclosed the conflict;
- Made or supported the decision of a committee or board concerning the matter; had a rational basis for believing (and did believe), that the decision was in the best interests of the company.
As a director, you need to communicate to the board, at the earliest possible opportunity, if any material information comes to your attention unless you reasonably believe that the information is publicly available or known to other directors or bound by a legal or ethical obligation of confidentiality.
Section 75 also places a duty on directors to disclose any personal financial interests. It states that if the director’s personal interests conflict with those of the company, the director must disclose the conflict of interest.
Where a company has more than one director, then the director who has a personal financial interest, or knows a related person who has a personal financial interest in respect of a matter to be decided at a board meeting must disclose this interest to the board.
After disclosure, the director must leave the meeting immediately and is not allowed to take part in consideration of the matter. They may not execute any document on behalf of the company in relation to the matter, unless specifically authorised to do so by the board.
Memorandum of Incorporation?
According to the CIPC, “the Memorandum of Incorporation (MOI) sets out the rules governing the conduct of the company, as specified by its owners.”
There are specific requirements that an MOI needs to meet, according to the Act. Having an MOI is necessary to protect the interests of shareholders in the company and provides for several default company rules / alterable provisions, which companies may accept or alter as they wish as long as it is in line with the Companies Act.
The Act also indicates that a company’s MOI may:
- Expressly authorise one or more named persons to appoint and remove directors, provided that one or more persons are to be ex officio directors of the company,
- and provide for the appointment or election of one or more persons as alternate directors of the company.
Keep in mind that Shareholders still have the authority to appoint and remove directors in terms of the Shareholders Agreement and MOI of the company.
Which types of directors do you get?
The Act does not distinguish between the different types of directors; however, King IV provides the following:
- Executive company director: a full-time salaried employee of the company, who is involved in the day-to-day running of the business.
- Non-executive company director: a part-time director not employed by, and not involved in the day-to-day running of the business.
- Independent non-executive officer: a director who does not have a relationship with the company outside his/her directorships.
- Prescribed officers (generally known as the Chief Executive Officer, Financial Director and the Chief Operating Officer) are persons who:
- Exercise general control over and management of the whole, or a significant portion, of the business and activities of the company,
- Regularly participate in a material degree, in the exercise of general executive control over and management of the whole, or a significant portion, of the business and activities of the company.
Prescribed officers and directors are subject to the same strict duties and accountability. Therefore persons who fall within the definition of a prescribed officer must be identified by the board to make them aware of the consequences of accepting this appointment.
How must a board be structured?
The board of a private or personal liability company must include at least one director. And the board of a public or non-profit company must consist of at least three directors.
The company’s Memorandum of Incorporation (MOI) may specify a higher minimum number of directors, as the founding members may desire a minimum on the board.
Both King IV and the JSE listing requirements recommend a balance of power to the board of directors. To achieve this balance of power, you should consider the following:
- An appropriate mix of knowledge, skills and experience;
- An appropriate mix of executive, non-executive and independent non-executive members;
- A sufficient number of members that qualify to serve on the committees of the governing body;
- A quorum at meetings;
- Regulatory requirements, for the specific industry applicable to the company;
- Diversity targets relating to the composition of the governing body.
Can directors incur any liability?
According to the Act, directors who fail to comply with their duties should be held personally liable for losses, damages or costs sustained by the company as a direct or indirect consequence of having knowingly acted without authority and in breach of the duties imposed by Section 76.
The Act further provides for the liability of directors, where they trade recklessly or conduct the company’s business to defraud a creditor.
Section 22(1) of the Act states that a company must not carry out its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose.
This means that, if reasonable business people stand in the shoes of the directors, and see no reasonable prospect of the creditors receiving payment when due, it will be a proper conclusion that the company’s business is being carried out recklessly or negligently as contemplated by section 22(1) of the Act.
Section 214 of the Act states that: A director/person is guilty of a criminal offence if they were knowingly a party to an act, or omission by a company calculated to defraud a creditor or employee of the company, or a holder of the company’s securities or with another fraudulent purpose.
Directors are, however, able to raise “honest and reasonable” behaviour on their part as a defence in these circumstances.
Section 218(2) states that any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.
Does a director have any defence?
Section 77(9)(a) of the Act states that in any proceedings against a director (other than willful misconduct or willful breach of trust), the court may relieve the director, either wholly or in part, from any liability set out in this section, or on any terms the court considers just, if:
- it appears that the director has acted honestly and reasonably;
- or regarded all the circumstances of the case, including those connected with the appointment of the director,
it would be fair to excuse the director.
Sections 76 and 77 of the Act intends to protect directors, who in carrying on the business of a company, have shown a genuine concern for its prosperity and have made decisions in its best interest. Directors should note that any inquiry into the conduct of the affairs of a company will always involve an evidential investigation.
If you decide to become a director, you cannot, and should not take this decision lightly. The Act imposes a plethora of wide-ranging duties on a director to ensure that they always act in the best interest of the company and always act in good faith.
Directors can be held personally liable to the company for any loss, damages or costs sustained by the company due to the actions of the director in some instances.
Remember that each case will be judged on its own merits, as the courts will consider whether the director acted in good faith, with care and on an informed basis having regard to the knowledge, skill and experience of the particular director in question.
If you are considering becoming a director and would like more information as to what your duties and responsibilities will be and the potential personal liability that can arise, contact Ramirez Attorneys.
– By Sascha Ramirez – contact [email protected]