When can a Director of a Company be Held Personally Liable

When can a Director of a Company be Held Personally Liable

Prior to the new Companies Act 71 of 2008, Directors’ duties were never recorded. This meant that the Directors’ duties were simply common law rules and the rules created by the Articles of Association and/or a Memorandum of Association; rules to be adhered to. There was a fine line between what the duties of a Director were and whether or not they were being breached. However, this changed when the new Companies’ Act was implemented in 2009.

Over the years the South African Companies and the Directors thereof have been scrutinised for their actions, and some have even been held personally liable for certain indiscretions. The argument regarding whether or not a Director should be held personally liable for a breach of duties is one of the most challenging arguments which our Court could hear today.  This is not only a very time-consuming issue but there is also a risk that the Director might suffer reputational damage for being seen to not have properly and diligently fulfilled their fiduciary duties.

Should the Directors’ bad faith actions cause the Creditors to be prejudiced against the Company, the Creditors may rely on the common law analogy of piercing the ‘Corporate Veil’. This term is when a Director is held personally liable for their actions instead of their Company.

With regards to the Old Companies Act, Companies and their Directors would generally be guided in such a way because the Act was so limited in relation to the provisions founded in the Act. This would also lead them to carry out the duties in accordance with their Articles of Association and or Memorandum of Association and Common Law where applicable.

The New Companies Act is more detailed with regards to the Fiduciary Duties of Directors and Companies, and it may hold both Director and Company jointly and severally liable. Directors are personally accountable for a great deal more when things go wrong, and when this happens the consequences can be devastating for the Organisation and its Directors.

A Director is required to act in good faith, act independently and with a degree of care, skill and diligence that may be reasonably expected of a person of similar standing. The duties vary as per the Companies, and to write every single duty which is applicable to every Director is not the intention of this article.

A Director should know his Common Law duties in addition to his regulations as per the Companies’ Memorandum of Incorporation and must further this knowledge by understanding the Criminal Procedures Act of 1977, the Protected Disclosures Act of 2000, and the Financial Intelligence Centre Act of 2001. In addition the Director must also be familiar with the Promotion of Administrative Justice Act 3 of 2000 and many more Acts which coincide with the Company and the MOI.

The MOI might have its own sanctions in relation to the Fiduciary Duties of the Director. Moreover, personal liability including criminal sanction, are common cause for concern; yet many Directors are blissfully unaware of the immense personal risks they face when they do not fulfil their duties as Directors. Even worse is when Directors naïvely believe they need only rely on their old practises of simply applying common law in order to ‘play it safe’.

Another fine line is between what is above board and what is not above board. In order to differentiate between these two situations one could refer to the King IV Report on Corporate Governance 2016 which incorporates the previous King III Report.

In the Courts of South Africa, most Judges and/or Magistrates will look at the Business Judgment Rule to establish whether or not the Directors have fulfilled their duties. If not, in certain circumstances, these Directors can be held personally liable.

Considering that these cases are becoming more popular in today’s Courts, a Director should understand his rights as a Director and the risks he might encounter should he act in a manner which might appear to be in bad faith. Fiduciary responsibilities have expanded so that the customers and innocent bystanders enjoy a level of acceptable protection in our Law.

This also applied to members of a board in terms of a Home Owners’ Association whereby the Directors acted in bad faith. This acrimonious matter led to various types of Applications being brought including Postponement Applications on more than one occasion and an Application to prevent an Extraordinary General Meeting being held to for a vote of no confidence.

The main cause of this case was to have an Independent Auditor appointed to see whether or not the funds of the HOA were being used in terms of the Memorandum of Incorporation. This was opposed and a Trial began.

The Courts Ordered that the Directors must appoint an independent Auditing Firm to do a Forensic Audit from inception to date hereof; to conduct an Extraordinary General Meeting to discuss the way forward with the Home Owners, and to pay costs of the Applications from inception; inclusive of two Counsellors and two Senior Counsel.

With the amount of duties for various types of companies, the best solution to understand whether or not one is acting in accordance with the Fiduciary Duties of a Company, the Companies Act and the Memorandum of Incorporation, is to consult with one of our highly trained Attorneys at this Firm who will take great pleasure in advising you accordingly.

Bradley Cullingworth

Candidate Attorney